September 8, 2023
By Steve Blumenthal
“If the quarterback throws the ball in the end zone and the wide receiver catches it, it’s a touchdown.”
– John Madden
Football season has begun, and I imagine the number of Google searches checking Vegas odds is dramatically up. My son Matthew sent me an invitation to join a “knock-out” pool. You bet on one team to be the winner each week, and it’s $20 per entry. The catch is you can’t pick the same team twice. I think there are around 1,000 people in the pool.
According to Fox, the top ten teams with the best odds of winning the Super Bowl this year are as follows:
1. Kansas City Chiefs: +600 (bet $10 to win $70 total)
2. Philadelphia Eagles: +650 (bet $10 to win $75 total)
3. Buffalo Bills: +900 (bet $10 to win $100 total)
4. San Francisco 49ers: +1000 (bet $10 to win $110 total)
5. Cincinnati Bengals: +1100 (bet $10 to win $120 total)
6. Dallas Cowboys: +1400 (bet $10 to win $150 total)
7. New York Jets: +1600 (bet $10 to win $170 total)
8. Baltimore Ravens: +1800 (bet $10 to win $190 total)
9. Detroit Lions: +2200 (bet $10 to win $230 total)
10. Miami Dolphins: +2500 (bet $10 to win $260 total)
We are excited here in Phila—and a lot of love in the Blumenthal household for our EAGLES—but how about Aaron Rogers and the New York Jets? Oddsmakers rank them at #7. My Jets-fan friends have assured me, though, that there is a very high probability the team will find a way to disappoint (again).
In last night’s opener, I was rooting for the Kansas City Chiefs over the Detroit Lions. Favored by 4.5 points, the amazing Patrick Mahomes and his Chiefs lost the game 21-20. Another exciting season has begun.
I have to say, I sure do miss the great John Madden. He was a humble and kind human being with some fun (and sometimes funny) remarks: “Hey, the offensive linemen are the biggest men on the field, they’re bigger than everybody else, and that’s what makes them the biggest men on the field.” And can’t you hear him, with the emotion in his voice, screaming, “It’s a touchdown!”
Grab that coffee. It’s a short post today with a handful of charts. We’ll look at recession probabilities and the coming 10-year total return outlook for the S&P 500. Not quite as fun as football. But hey—it is the biggest game in which we are all playing.
Here are the sections in this week’s On My Radar:
- Leading Economic Indicators
- Student Loan Payments To Restart
- Helicopter Money – Excess Savings Spent
- Future Return Expectations
- Random Tweets
- Personal Note: U.S. Women’s Mid-Amateur
- Trade Signals: The S&P 500 Remains Extremely Overvalued, Bearish on Bonds, A Bull Market in Oil
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
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Leading Economic Indicators
“The US LEI—which tracks where the economy is heading—fell for the sixteenth consecutive month in July, signaling the outlook remains highly uncertain,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.
Ned Davis Research has an excellent chart showing the data series from July 1948. There have been 12 times that the LEI has declined below zero, and in all twelve instances, recession followed. Putting my Vegas odds marker hat on, I see a high probability of a recession in our near future. Best guess Q4 2023. Unfortunately, due to data rules, NDR could not allow me to share the chart with you. Here is a look at a somewhat similar chart from The Conference Board’s website. Recessions followed the drop below the 0 line.
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Student Loan Payments To Restart
When? October 2023. The government advises, “Don’t wait for your bill to arrive. Start preparing now.”
Robert Schuster, CFA, CMT and Senior Wealth Advisor here at CMG, wrote the following piece on Student Loan debt; we want to share it with you. He has some interesting insight.
Fear that the resumption of student loan payments (money borrowed for perceived value) will slow the economy is not based on all the evidence. Let’s take a deeper look at the details.
While student loan debt is the 3rd largest liability for households, and there are potential theoretical drags on the economy, there is also another side to the argument.
- Student loan payments represent an estimated 1.2% of personal consumption expenditures (PCD). With real PCE at 2.27% (6/2023), the PCE growth rate could be cut in half.
- The resumption of student loan payments could push household debt service levels to the highest level since the mid-2000s.
- With person saving rates at 4.3% (6/2023), nearly the lowest since 2008, the resumption of student loan payments could impact household spending.
However, as with most politically charged topics, there are usually details left out of the talking points:
Averages can be tricky things; the composition of the underlying drivers of the date is left out. In the student loan case, nearly 43% of student loans are held by the highest income group (quintile), and over 70% of student loans are held by the top two highest-income earning groups (quintiles).
- High earners tend to save more, and Ned Davis Research estimates there is still nearly $600 billion in ‘excess’ savings (savings over trend levels) from the pandemic. This offsets student loan payments for nearly three years.
- Only 7% of student loan borrowers owe an excess of $100,000, about a third owe less than $10,000, and over 50% owe less than $20,000.
- But again, it’s about looking beyond the headline numbers, as those with advanced degrees owe about half of the outstanding student loan debt.
As shown in the NDR data, there are plenty of offsets to the resumption of student loan payments to suggest the economy will not be detrimentally impacted. There are plenty of things the economy can worry about, but student loan payment starting back up is not one of them.
Source: Ned Davis Research, ‘Can Student Loans drag down the economy?’ Veneta Dimitrova and Joe Kalish. Summary by Robert Schuster, CFA, CMT.
SB Here: Sound points. Can’t be a net positive. Less money in the pocket left over to spend. But maybe not be as big an impact as I’ve been anticipating. We’ll spend more time on this… I really love thoughtful discourse. Robert, by the way, spent much of his career at Ned Davis Research. We became good friends, and when he retired from NDR, I twisted his arm to join CMG. Luckily Robert is on the team. He is super smart.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Helicopter Money – Excess Savings Spent
One of the things that has been holding off recession has been the COVID money that was dropped directly into the hands of businesses and consumers. As you see below, the excess savings are almost gone. Combine this with rising interest rates, rising mortgage rates, continued inflation pressures, rising credit card delinquencies, and the restart of student debt repayments in October; it’s hard not to see a recession coming our way.
I think the COVID money and the $1.7 trillion the government has borrowed and spent (government deficit) have stayed off recession to this point. With the debt ceiling unbound until after the election, the best guess is our fine leaders will stay at it. That will all come with a price—interest payments alone above $1 trillion a year and nearing 5% of GDP. Debt has limits.
The point in this next chart is the excess savings are nearly gone.
Future Return Expectations For The S&P 500 Index
Following are two charts. Both look at how much U.S. Households have allocated to stocks as a percentage of their overall allocation to stocks, bonds, and cash. The current number is 57.75% of their portfolio. The idea here is simple, when fully invested, there is less money available to buy more stocks.
Looking at data back to 1951, readings above 52% allocated to stocks reflected a high allocation. I marked in red the years that preceded bear market corrections. You can see that 2000 and the beginning of 2022 were highest at just above 60%.
You can find my mid-year report on valuations here. The idea today is to look at probable coming returns from a different perspective – hard data based on individuals’ investment behavior—all in at market tops, underweight at market bottoms.
- The middle section (orange line) plots the percentage allocated to stocks.
- Note the low subsequent returns from 1999-2010 (blue line center section in chart). And the high annualized returns from 2010 to 2020.
- The blue line stocks in 2013 because we don’t yet know the 10-year return from 2014 to the present.
- Now look at the lower section. The bold red arrow points to our current situation. Current Household allocations to stocks put us in the top 20% of the highest allocations. You can see the worst 10-year outcome, the best 10-year outcome, and the average.
- The green arrows show, “We’d be better off here.”
- A good target to set for yourself is U.S. Household Stock Allocation to stocks between 40% and 45%. I think we will get a swing at that pitch sometime in the next few years. Of course, no guarantees.
- The red arrow points to the expected 10-year annualized total return for the S&P 500 Index (2023 to 2033).
- Simply note how closely the dotted orange line (actual Subsequent Rolling 10-year S&P 500 Index Total Returns) correlated with the blue line (Equity as a Percentage of Total Household Equities, Bonds and Cash).
- When investors are heavily allocated to stocks (fully invested), there is less money available to buy more stocks.
- Bottom line: The forecast is for 0% to -1% per year over the coming ten years. There is No way of knowing the actual results, but Vegas oddsmakers say a better entry point remains ahead. Hard to fight the math.
“I always used to tell my players that we are here to win! And you know what, Al? When you don’t win, you lose.” – John Madden.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
From The Great Marty Zweig:
Higher for Longer:
Since 2020, the US Has Printed Nearly 80% of ALL Dollars in Circulation (#INFLATION):
Personal Note: U.S. Women’s Mid-Amateur
Disappointingly, Wednesday’s high school soccer game was postponed due to the heat. I caught an early flight home from Nashville and didn’t learn the news until I landed. “Chin up,” I said to myself. “There is always another.” Coach Sue and her Friars play tomorrow at noon, and I was given a new MP Soccer hat. So, I’ve got that going for me.
I was in Nashville on Tuesday to meet the operator behind a private debt deal we are looking at. While not without risk, a three-year, 15% note sits senior in the capital stack and is well-collateralized. The trend of higher interest rates has its benefits. We plan to move forward and take a deeper look.
Later Tuesday night, we played golf at a course called Troubadour, dined at Cork & Cow Restaurant (fantastic), and stayed at the Harpeth Franklin Hotel. I recommend them all! Check out Franklin, TN, if you have the chance.
Speaking of golf, the U.S. Women’s Mid-Amateur Golf Championship begins tomorrow at Stonewall Golf Club—my home course!—which is located about 40 miles northwest of downtown Phila. The club has two courses, both of which were designed by Tom Doak. The older of the two is aptly called the Old Course. This year’s Mid-Am will be held on our second course, The North Course: average names but an above-average logo.
The U.S. Mid-Amateur originated in 1981 for the amateur golfer of at least 25 years of age to provide a formal national championship for the post-college player. Players must qualify to enter, and this year there are 264 players. They begin the championship with two rounds of stroke play, after which the 64 players with the lowest scores (with a playoff if necessary to get the exact number) advance to single elimination match play. In golf, the lower the score you post, the better.
The semifinal matches and the championship match will be televised on Fox on the following dates and times:
- Semifinals: Wednesday, Sep. 6 @ 4-6 p.m. ET on FS1
- Championship: Thursday, Sep. 7 @ 4-6 p.m. ET on FS1
The North Course came about 10 years after Tom Doak built the Old Course. Doak had intended for the North Course to have its own character yet complement its predecessor.
The Old Course is more challenging tee-to-green while the North Course green complexes are more difficult. As Doak noted, “On the first golf course, most of the greens are tilted, and if you miss to the high side, you’re in trouble. On the new course, the greens are more intricately contoured, and depending on where the hole is from one day to the next, there might be a different side you’d want to miss on in order to have a chance to get up and down.”
I played The North Course last Sunday. The greens were running at an 11 or 12. In English, I never seen them faster. They’re in peak condition. I reached a point where I just laughed at myself as another putt rolled 15 feet past the hole.
I hope you tune in next week on FS1 to get a feel for how beautiful the Pennsylvania countryside is. What a challenge ahead for the players. I plan on walking the course to watch these amazing golfers compete in person.
Wishing you a great week!
Trade Signals: The S&P 500 Remains Extremely Overvalued, Bearish on Bonds, A Bull Market in Oil
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
A quick look at valuations – visualized in one chart. The S&P 500 remains in the extremely overvalued red zone. Long-term unattractive in terms of 3-, 5-, 7- and 10-year potential returns. The short-term trend remains bullish; however, investor sentiment is back in the “Extreme Optimism” zone. Sell the rallies. Its fair value is 3,200, nearly 30% below the current price.
And how about oil over $90?
The dashboard of indicators follows. You’ll find the updated charts with the explanations section below.
The dashboard of indicators and the stock, bond, developed, and emerging market charts, along with the dollar and gold charts, are updated each week. We monitor inflation and recession as well. If you are not a subscriber and would like a sample, reply to this email, and we’ll send you a sample. The letter is free for CMG clients. You can SUBSCRIBE or LOGIN by clicking on the link below.
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.
With kind regards,
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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