May 7, 2021
By Steve Blumenthal
“Prediction is very difficult,
especially if it’s about the future!”
– Niels Bohr, Nobel Laureate, Physics
“Making predictions is tough,
especially if it’s about the future!”
– Yogi Berra, Late Yankees Baseball Player, Manager and Coach
Both quotes serve as an important warning when it comes to the predictions we make. In most circumstances, predictions are less accurate than we think, due to unknowns we failed to consider. In-sample forecasts use a subset of available data (think of it as data we think we know) that may affect a prediction. Out-of-sample forecasts use all available data. Essentially, everything we know and may not know has an impact on our prediction models. It’s why saying, “I could be wrong,” before stating a particular view or outlook always makes sense—at least to me.
With that said, investing is a game of probabilities, and with an awareness there are things we may not fully know, I do believe we can tilt the odds in our favor. Maybe that’s why I look forward to the Mauldin SIC (Strategic Investment Conference) each year. The line-up is a who’s who of thinkers and leaders. David Rubenstein and Todd Rich kick off day two today, Barry Ritholtz interviews Jeff Immelt and Dr. Lacy Hunt, and Jim Bianco will debate monetary and fiscal policy and MMT (Modern Monetary Theory). I am really looking forward to learning what I might not know about what I think I know.
Day one didn’t disappoint. Annual lead-off hitter, David Rosenberg took the stage (virtually, from his Toronto desk) and shared his belief that inflation will be transitory and deflation remains the major theme. Rosenberg was an all-star analyst at Merrill Lynch, and started his own economic consulting firm in January of 2020, Rosenberg Research & Associates, after spending a decade as chief economist and strategist at Gluskin Sheff & Associates.
Debt and demographics remain the dominant headwinds. David said inflation fears are way overblown. Given the spike in yields, he recommends going long the 30-year Treasury bond. He believes the paper loss of more than 20% since the recent spike in yields, too, is transitory. And for the opportunistic trader, a drop in yields back to last September’s level means a gain of roughly 25%. A 1% 30-year Treasury yield is not out of question. I like to think of this a potential play in the EXPLORE bucket especially when the Zweig Bond Model is signaling buy (which is the case today), but make sure to size the risk appropriately and speak to your advisor about suitability. Given that rates are still very low, while reward is high, risk is high as well.
Dr. Michael Roizen, Chief Wellness Officer of the Cleveland Clinic, gave us an update on the pandemic (actually two pandemics: COVID-19 and Opioids) and discussed the present and future of aging and how to live a healthier lifestyle. He explained that “the research in aging mechanisms will get us an exponential increase in life expectancy. For example, in 2020, age 60 was the equivalent of age 40 in 1980. By 2030, ninety will be the new 40.”
“We will be living longer, and we will be younger while we are living longer,” Dr. Roizen told the SIC’s 4,000 attendees this past Wednesday. He said we should prepare for a younger tomorrow. I don’t know of any economist factoring that into their in-sample models at the moment. Think about that out-of-sample impact on Social Security, Medicare, and underfunded pensions. Not lost is the fact that Dr. Roizen is giving us very good news. Who can’t like this next chart?
He also shared that “changing behavior is the key thing for preventing all chronic diseases and infections.” He was joined by Dr. Dan Culver, who expanded on what we know and don’t know about the virus. I share a few quick takeaways further below.
The first day of the conference also featured political strategist Bruce Mehlman and real estate expert and good friend Barry Habib, who was joined by Ivy Zelman, CEO of Zelman & Associates. Camp Kotok fishing friend Constance Hunter, KPMG’s principal and chief economist, spoke as well, and George Friedman, founder and chairman of Geopolitical Futures, presented on geopolitics, zeroing in on China and Russia. The day concluded with a China panel moderated by Mark Yusko, CEO and CIO of Morgan Creek Capital Management and managing partner of Morgan Creek Digital Assets. The panel was titled, “The New Cold War with China.” Put China on your out-of-sample, yet unknown risks list.
Grab a coffee and find your favorite chair. Notes on Rosenberg and Roizen follow, and I will continue to share select insights over the coming weeks (expect my notes on the China discussion next week). But really, I’ll be sharing just a fraction of the conference’s content. Today is just day two, and the sessions will continue on Monday, Wednesday, and Friday of next week.
With so much to cover, Mauldin and team have added a “bonus day,” Tuesday, May 18, and I’ll be speaking with Mauldin Economics’ Ed D’Agostino to close things out. We’ll talk about how an investor might pull together the best ideas from the conference and incorporate them into their portfolios. I’m really looking forward to that. If you haven’t signed up yet, you can still do so. All of the sessions are being recorded (both video and audio). I plan on listening to a few on my car ride to Penn State for son Matthew’s graduation later this evening. You can register here.
(Side note: Though I partner with John on the investment side of his business affairs, Mauldin Economics runs the publishing and newsletter side of John’s business, and the two are entirely separate from each other. I am a fan of their work and a client and do not receive any compensation should you decide to register.)
This week’s On My Radar:
- David Rosenberg: The Consensus is Wrong about Stocks, Bonds, and Inflation
- Dr. Michael Roizen: An Update on The Virus – “6 Normals +2”
- Trade Signals – Acceleration in Margin Debt’s Euphoria
- Personal Section – Graduation
David Rosenberg: The Consensus is Wrong about Stocks, Bonds, and Inflation
This article is by Robert Huebscher from Advisor Perspectives, published on May 6, 2021. It’s based on a presentation from John Mauldin’s 2021 Virtual Strategic Investment Conference. I’ve shortened Huebescher’s article to focus on David Rosenberg’s main predictions and am providing the link here if you would like to read it in full. I’ve organized what I believe are the key points in bullet-point format below. Let’s jump in:
- The consensus is that U.S. equities will deliver strong performance as the economy recovers, and that higher inflation will drive rising interest rates. All of that is wrong, according to David Rosenberg.
- Inflation will be transitory: The “fiscal juice” from stimulus checks and the re-opening of the economy are outstripping supply, creating temporary inflation. Supply will catch up when demand subsides as the effect from the stimulus wanes, according to Rosenberg. That will happen before the end of the year.
- When the effect of stimulus checks expired last year, the GDP declined by 2.5%. We will see a repeat of that this year, according to Rosenberg.
- Inflation is not a temporary phenomenon; it is a process of ongoing acceleration in the price level.
- We don’t and won’t have a trend of inflation, Rosenberg said. Fed Chairperson Jay Powell will be right that inflation will be transitory, he said, just as deflation was a year ago when the pandemic began.
Rosenberg recalled one of Bob Farrell’s classic market rules:
- When all the experts and forecasts agree, something else is going to happen.
- The consensus has never been more lopsided, he said, and that is reflected in asset allocations that heavily weight stocks relative to bonds.
We are not going have a redux of the prior century’s “roaring ’20s,” despite the covers of many business magazines.
- Rosenberg said that era had nothing in common with today; the debt-to-GDP in 1920s was 10%, which allowed for declines in personal tax rates, which will not happen in the 2020s.
- GDP declined 3.5% last year, which was the worst drop since 1946. A decline rarely happens two years in a row, he said, and we are experiencing the expected recovery.
- There was a corresponding 5.5% decline in employment last year, but that means the economy gained in productivity. Productivity is an inflation killer, he said.
“We can produce more with less labor input,” Rosenberg said. Real GDP is now within a percent of its pre-pandemic high, but employment is down about eight million.
- The economy is booming not just because of the re-opening. The critical piece was the government’s $3 trillion in fiscal support. There has been no organic growth, he said. “It has been largely a fiscal stimulus story.”
“How could we not have a recovery?” Rosenberg asked rhetorically.
- When you strip out the government transfers, real personal spending is on a downward trend.
- The share of personal income from government spending is 28%; it has never been that high, according to Rosenberg. That is today’s “soup line,” he said, and it is temporary, based on borrowed money. Approximately 10% of the labor force is receiving government support.
Economic growth has been four parts stimulus and one part reopening, according to Rosenberg.
- “We are basically 80% reopened,” he said. There will be no more incremental growth from re-opening.
- There will be small growth form pent-up demand on the services side, particularly from travel and leisure. But that is an $800 billion sector in a $20 trillion economy, making it a recovery in only 4% of GDP. “We spent like never before on durable goods during the recession,” Rosenberg said, and that represents a $2 trillion sector that is up an unprecedented 12%.
- Don’t count on growth from pent-up demand in the services sector, which he called a “nebulous concept.” Some services are lost forever, like demand for restaurants and haircuts that consumers have long since forgotten about.
- At the same time, we are massively oversaturated on “stuff,” he said, from growth in durable goods.
- The small growth from pent-up services demand will be offset by the bigger “pent-down” decline from durable goods, he said.
Other parts of the economy are in decline, according to Rosenberg, including commercial construction, exports (a $2 trillion sector), and travel and tourism.
Fed Chairperson Jay Powell is forecasting 6.5% growth this year, which is implies 2% growth in Q4. The consensus is 5% growth for Q4, according to Rosenberg. The earnings consensus is 10% growth, which he said is “not going to happen” with 2% economic growth.
- “Earnings will disappoint,” he said, “and that is the principal risk for the markets going forward.”
Rosenberg went through a litany of data points supporting his thesis of low inflation.
- He cited a survey of money managers that showed only 7% think inflation will be less than 2%. Searches for inflation on Google have never been greater. The inflation trade is “crowded,” Rosenberg said.
- Inflation won’t come from commodity price increases. Most of the commodity demand has been financial and speculative. China is slowing its production because it is not stimulating its economy, and it consumes half of the world’s commodities.
- The positive returns for commodities will reverse in the second half of the year, according to Rosenberg.
Employment is still seven million less than the peak of the cycle. That excess labor supply is deflationary and will take several years to be absorbed into the workforce. There is no sign of wage acceleration, according to Rosenberg.
- The University of Michigan consumer sentiment survey shows that inflation expectations are within the range they have been for the last decade, he said. The top concern of the small business sector is taxes; inflation and interest rates are the two lowest concerns.
- Only 13% of those in a recent Barron’ssurvey were neutral to bullish on Treasury bonds, according to Rosenberg.
- The break-even inflation rate is 2.5%, which was the peak rate in the last cycle, when unemployment was 3.5%. “I am not buying that,” Rosenberg said, implying that he expects lower inflation given the current U-6 unemployment rate of 11.1%.
- The Cleveland Fed model is predicting lower inflation, he said. “The market is priced for peak inflation and for the Fed funds rate to go above 2.5%, which is higher that it was in late 2015.” That was when the Fed had to cut rates.
- “That is why I am bullish on Treasury bonds,” Rosenberg said.
- Productivity is an inflation killer, according to Rosenberg. Capital spending hit an all-time high during the pandemic, which will drive higher productivity. That, he said, is more powerful than a price push from commodities.
- Not even demographics are inflationary. We are aging, he said, but that will not dampen demand for goods and services in the economy.
Public sector debt constraints have gotten worse, according to Rosenberg, but we know from history that is a constraint on demand and interest rates, and hence deflationary. The economy can’t tolerate an increase in debt servicing; a 1% increase in interest rates would cost 800 billion annually, he said.
- Household savings have increased during the pandemic, which is also deflationary.
- Consumers are spending less of each subsequent stimulus package.
- A third of last stimulus was used to pay down debt, which Rosenberg called a new secular trend.
- “The fundamental trend is that the natural rate of interest is going down,” he said. “Rates won’t go up with a secular move by households to get their balance sheets in better shape.”
Globalization, which acted as a constraint on inflation, is not dead, and global trade and export volumes are hitting new highs.
- Rosenberg said the disruption we are seeing in supply chains is creating inflation pressures.
- But we should not extrapolate that into the future. Ports in cities such as Los Angeles are full and containers ships are waiting to be unloaded. There will be a critical supply support in the second half of the year.
- Korea and Taiwan will alleviate the shortage in semiconductors sooner than most people think.
- Canadian lumber production is surging and will quickly catch up to demand later this year, according to Rosenberg.
- Inflation is 1.5% or less globally, according to Rosenberg, and U.S. inflation has been 64% correlated to global rates. This too acts as a constraint on U.S. inflation.
Rosenberg concluded by offering some investment recommendation in the context of his low inflation forecast.
- It is a good time for growth stocks, Treasury bonds, and rate-sensitive parts of the market, he said.
“What I am worried about is what nobody else is talking about,” he said. That is not inflation or supply shortages of goods, which will be remedied.
- We have a housing bubble, he said, although not as big as in 2006-2007. Houses are 20% overvalued relative to income and rent.
- The Shiller CAPE ratio of 37 makes stocks the second-most overvalued in history, surpassed only during the dot-com era.
- That is a constraint on future returns, he said, and is consistent with 0% real returns for next 10 years.
He is also worried about the net worth-to-income ratio, which is at an all-time high. Rosenberg says it will revert too.
- “That has me worried,” he said. “If that mean reverts, we are going into a recession.”
Again, you can find the full post here. As with all predictions, the time frame in which you view them makes a difference, and they may be proven right or wrong. For example, Robert Huebscher commented in his piece, “Before you place too much weight on Rosenberg’s analysis, recall that he delivered the opening keynote at this conference last year, when he proclaimed that U.S. equity market bulls were in ‘fantasyland.’ He was wrong. The return for the S&P 500 for the last year was 56.25%.”
What Huebscher didn’t say was that Rosie was bullish on high dividend-paying stocks, as well as bonds. VIG, a popular dividend appreciation index ETF, is up approximately 38% over the same period.
Dr. Michael Roizen: An Update on The Virus – Get to “6 Normals +2”
During this year’s SIC, Dr. Roizen updated us on the data he shared with us a year ago. We’re seeing progress—and also concern. He said, “Get vaccinated and get all you know vaccinated. There is a 40,000-to-one reward-to-risk ratio.” He also talked about the importance of lifestyle habits in avoiding chronic disease.
His advice? Get to “6 Normals +2.” Here’s what that means:
- Get your blood pressure to less than 130/85.
- You should have a BMI (Body Mass Index) of 21 to 29.9, or a waist circumference of less than half your height.
- You should have a fasting blood glucose of less than 107, or an A1C of less than 6.4.
- You should have an LDL cholesterol level of less than 100 if you have no risk factors for disease, or less than 70, if you’re at risk for diabetes or heart disease.
- You shouldn’t have any cotinine (tobacco end-product) in your urine.
- You should complete a stress-management program or control your asthma.
The +2? Seeing your primary care provider regularly and getting all recommended vaccinations.
Other tips on “Lowering Your Risk in the Age of the Coronavirus”
- Get vaccinated and all you know vaccinated, there’s a 40,000-to-one benefit
- Meet outside with only vaccinated people
- Be aware of factors that increase the likelihood of death from SARS-CoV2
- Double mask—it works. You protect others and you protect yourself
- Wash your hands, especially before touching your face and eating
- Far UVCs work to kill the virus without hurting humans
On Life Expectancy:
And, as I shared above, Dr. Roizen said that in 2020, age 60 was the equivalent of being age 40 in 1980. By 2030, 90 will be the new 40.
An unprecedented increase in one decade of 30 more years of life… and a younger, healthier life at that… Amen to that!
Trade Signals – Acceleration in Margin Debt’s Euphoria
May 5, 2021
Notable this week:
Last week, we looked at margin debt as a percentage of GDP. This week, let’s take a look at the rate of change in margin debt as a market indicator.
- The following chart looks at the year-over-year percentage change in margin debt. Sell signals are generated when the percent change rises two standard deviations above the historic mean (black down arrows).
For the layperson, standard deviation measures the average amount of variability in your data set. It tells you, on average, how far each score lies from the mean. A two (2) standard deviation move happens infrequently. Think of it as a way to measure rare events or another way to look at it is an extreme deviations from a normal trend.
Since 1980, when looking at the year-over-year rate of change in margin debt (above chart), there have been just eight times such a move has occurred (black down arrows). The most recent signal just fired on April 30, 2021. Note the data box in the upper left-hand section. I think of this data as a measure of “euphoria.” We have reached euphoria.
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
Click here to see the Dashboard and Charts with Explanations from this week’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 – Graduation
The conference is playing on my laptop as I finish writing today. David Rubenstein’s interview has me so inspired. The discussion ranged from business, the economy, and politics, to leadership and philanthropy. An open and humble man… what a gift he is. The interview was filled with advice for young and old. I’ll organize my notes and share them with you in the coming weeks.
Son Matthew graduates tomorrow morning. It’s about a three-hour drive to Penn State, and I hope to get there this evening in time to meet Matt and his friends for an IPA. In my personal note a few weeks ago, I shared “Advice for a Young Entrepreneur.” He has yet to read it, so I’m providing the link again here. Come on, Matt.
Please feel free to share it with someone you love. I’m going to share the David Rubenstein interview with my children too.
Puerto Rico turned out to be an excellent trip. With all the money flowing to green energy, solar energy in Puerto Rico is a likely beneficiary. The meetings were productive and I’m looking forward to seeing what may develop from here. Last Tuesday night, I landed in New York City, and Wednesday evening I celebrated friend Rory Riggs’s birthday at Madison Square Garden watching the New York Rangers fight the Washington Capitals.
You may have seen the news: one second into the game, the Rangers players dropped their gloves and for the next five minutes, it was an all-out street fight. I’ve never seen so many players packed into a penalty box. Eventually, the mess on the ice cleared. The ref dropped the puck, and there was another fight. More men in the penalty box. Apparently, the Rangers were retaliating for a hit just two day prior when the two teams met, as they were exasperated by the fact that the league had done nothing in response. So, they took matters into their own hands (fists, actually).
We had a fun night, and I met a few new friends. All good.
Thanks for reading… Wishing you a great week.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Consider buying my newly published Forbes Book, described as follows:
With On My Radar, 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.
If you are interested in the book, 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.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
IMPORTANT DISCLOSURE INFORMATION
Investing involves risk. Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG Capital Management Group, Inc. [“CMG”]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
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.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.
Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is a general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purpose.
In a rising interest rate environment, the value of fixed income securities generally declines and conversely, in a falling interest rate environment, the value of fixed income securities generally increases. High-yield securities may be subject to heightened market, interest rate or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.