July 12, 2019
By Steve Blumenthal
“[I]f you could say well give me one rule to follow as an investor, just one, it would be,
do the things that are unpopular. Everything else being equal,
the things that are popular are overpriced the things that are unpopular are underpriced.”
– Howard Marks
Founder, Oaktree Capital Management
“Investment management requires the adaption of uncomfortably idiosyncratic positions.”
– Dave Swenson
CIO, Yale Investments Office
Over the last several On My Radar posts, I’ve shared my Mauldin Strategic Investment Conference (SIC) notes with you. The conference was simply outstanding. David Rosenberg, Lacy Hunt, William White, Howard Marks, Carmen Reinhart, Mark Yusko, and Felix Zulauf and many others presented.
One of the things I enjoy most is how John Mauldin structures his conference. The speaker presents and is then positioned on stage to have his/her views stress tested by peers. The conversation between Lacy Hunt and Bill White was fun to watch. Lacy is an economist/investor/Federal Reserve expert and owns one of the best mutual fund track records in the business. Bill worked as senior economist at the Bank for International Settlements. Bill believes the time for simple solutions is over and concluded, “In the end there will be inflation.” Let’s wrap up the conference series today. You’ll find a short “bottom line” summary of each presentation and links below.
Additionally, I conclude with sharing my collective thoughts along with a few ideas. “Do things that are unpopular,” Marks said. We’ll start there.
Grab that coffee and find your favorite chair. If you presented and I left your name out, it is only because there was so much to share and it is time to move on. My panel discussion with Peter Boockvar and Lakshman Achuthan was on the economy and timing of the next recession. I should point out that my recession timing has advanced. More on recession timing below… Thanks for reading, I do hope you’ve found my conference summary series thought-provoking, insightful and helpful. I can tell you it has personally helped with my forward thinking. OK, heat up that coffee and jump in.
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:
- Mauldin SIC 2019: Bottom Line – Howard Marks, Lacy Hunt, David Rosenberg, William White, Felix Zulauf
- Concluding Thoughts – What Might the Endgame Look Like?
- Trade Signals – Equity Markets Set New Highs on Expectations of Rate Cut; Increased Chance of US Recession?
- Personal Note – SF and LA
Mauldin SIC 2019: Bottom Line – Howard Marks, Lacy Hunt, David Rosenberg, William White, Felix Zulauf
Below you’ll find a “bottom line” summary of what some of the world’s brightest thinkers/investors believe lies ahead and their thinking on investment positioning. There is no better way to start than with the investment wisdom gained from Howard Marks. Do consider getting his book, Mastering the Market Cycle – Getting the Odds on Your Side.
“[T]he higher the market becomes in its cycle, the less likely it is to continue up and the more likely it is to turn down.”
– Howard Marks
Howard spoke about “A Bowl Full of Tickets.” The analogy was easy to understand. He said, “You should invest more when the tickets in the bowl are in your favor. You should invest less when they are against your favor and what determines the mix of the tickets in the bowl largely where we stand in the cycle.”
I loved how Marks explained investing in terms of probabilities. He said,
There is no sure thing [in investing]; there’s a bowl full of tickets and the tickets are all the future possible outcomes and fate or something some people say that it’s very determinable because it’s logical and mechanical, and other people think it’s completely random, but fate or something is going to reach in the bowl and pull out one ticket. Now that ticket may be the performance of GDP next year, the performance of the company’s earnings or the performance of the stock market or a given stock. They are going to pull out one ticket, one outcome, which becomes the actual outcome from the many outcomes and nobody should think that there is only one ticket in the bowl, you know. The point is, there really are no sure things in life.
Now if all performance, if all the future, is one ticket drawn from a bowl full of tickets, does that mean we can’t know anything about the future as investors and the answer is no, it doesn’t mean that because sometimes there are more winning tickets in the bowl than losing tickets, sometimes they’re more losing tickets in the bowl than winners and an exceptional investor is someone who has an above average awareness of the tickets in the bowl, even he doesn’t know what the outcome is going to be.
But the great investors that I know, know when they have a bowl full of winning tickets and not losers. You have one stock and you know that if there’s a 90% chance it will go up but a 10% chance it will go down and if it goes up, it could go up five times, but if goes down, it could go down 30%. That’s a great investment opportunity.
You still don’t know what the future holds, but that is highly investable and you should invest more. You should invest more when the tickets in the bowl are in your favor. You should invest less when they are against your favor and what determines the mix of the tickets in the bowl largely where we stand in the cycle.
Howard said we sit late cycle. And added,
I think of things as being cheap, fair or rich. And today, broadly speaking, there is nothing cheap and if you draw a midline down that range which we will call intrinsic value, there is almost or maybe nothing or virtually nothing that is selling below its intrinsic value.
So the question is what’s least overpriced. You know what’s the least worst and I think given the fact that we don’t want to be in cash, you have to look for the things that are least worst
And then you have to say, given the fact that the economic recovery is the longest in history and the bull market is the longest in history and the world is leveraged and there are all these cosmic things going on that the results of which are unpredictable. In investing in the medium term you should ask yourself if you want to be on offense or defense.
We sit late cycle. I still think that the probability of high returns is low and the probability of low returns is high. I don’t think we are setting the stage for some collapse, but I could be wrong.
Bottom line: The probability of low equity and fixed income returns is high. Sometimes more offense than defense, sometimes more defense than offense. Today, more defense. “Where we stand in the cycle.” “Tickets in a bowl.” “Getting the odds in your favor.” A nice way to put it. You can find the full Howard Marks-Mark Yusko post here.
Part I: Lacy Hunt, Ph.D. – What’s going to happen?
- Lacy thinks we are going back to zero bound (Fed Funds rate to zero percent). He expects velocity to fall and he’s concerned we will be stuck in a quagmire with a zero percent Fed Funds rate for some time. The yield curve will be a lot flatter. His fund has greater than 20-year duration.
- It will be ugly economically. He believes the 10-year is going to decline to 1% and the 30-year is going to bottom at a yield of 2%.
- We are not going to get growth. We are not yet at the end of the declining rate cycle… we have not yet seen the low in yields.
- He favors investing in long-term government bonds for total return.
Bottom line: Lacy believes yields are going lower. Buy long-term government bonds. You can find the full Hunt post here.
Part II: David Rosenberg – What’s going to happen?
- Rosie argues that recession is coming, rates are heading lower and we will move to even more unconventional Fed policy.
- He suggested that the 10-year Treasury may earn a total return of more than 11% over the coming 12 months. Interest rates are headed lower.
- He also likes quality dividend payers and going long volatility. For non-geeks, that is a bet that volatility will pick up to the downside (it will get very bumpy) and a way to play that for profit is to invest in the VIX. My dad would say, “A play that is ‘not for the faint of heart.’”
- Rosie sees a future “debt jubilee” where debt gets monetized somehow. Then inflation.
Bottom line: Recession is coming sooner than most believe. Interest rates are headed lower. He likes more defensive stocks like high dividend payers, long-term treasury bonds and active trading strategies. You can find the full Rosenberg post here.
Part III: William R. White – What’s going to happen?
Bill says the central bankers’ policies are fundamentally flawed and their flawed theory has led to flawed policy, both before and after the last crisis, and he believes that their flawed policy is going to lead to the next crisis.
He said, “We’ve had non-inflationary boom and, in the next crisis, predicts we are going to have a “debt deflationary bust, but what that might morph into is high inflation or even hyperinflation.”
The Fed’s (and other central bankers’) capacity to respond is now significantly reduced.
- Last time, interest rates were much higher. Now the interest rates are pretty close to zero in most places and are actually negative in many others.
- The size of the balance sheets are much larger: In the United States, the Fed’s balance sheet is 20% of GDP; in Europe, the ECB is 40% of GDP and in Japan, the BOJ is 100% of GDP.
- There may still be room but it’s going to be much more limited room due to the degree to which sovereign debt ratios in the advanced countries have ballooned — incredible.
- And this: The Fed’s “crisis resolution tools are inadequate.” The last time around, the central banks reacted in the right way. Now, “Dodd-Frank has got six separate provisions in it that will prevent the Fed from doing next time what they did the last time.”
- When you get a crisis, there are three phases. There is crisis prevention, then there is crisis management, then there is crisis resolution. Crisis resolution comes down to — we’ve got a big debt problem.
- So all I can advise to you, as you sort of think your way through (the outcome I see), first the deflation and then maybe the inflation, is to also put a lot more emphasis on the geopolitical stuff because increasingly, that’s where the action is going to be taking place.
- But since it’s an unhappy story that I’m telling today, I guess the only thing I can finish with is – good luck. You’re probably going to need it.
Bottom line: The global problem is debt. We sit late in the long-term debt super cycle. The debts are going to have to be restructured, written off, whatever and then we move on. “In the end the only way out of this mess is inflation.” You can find the full William White post here.
Part IV: Felix Zulauf – What’s going to happen?
“When I look at markets, I first start to create a long-term big picture. I look at structural trends in economics, in demographics, in politics, etc. etc. And then I try to analyze the business cycle and where we sit in the cycle.”
- What is not well understood today is demographics. I do not know of any econometric model that factors demographics into the model. There should be. I don’t know why. They have their models and they do not adapt.
- Some numbers… When you look at the OECD-member countries plus China, Brazil and Russia and you look at the age group of 0-64 year-olds, that age group was growing by 25 million every year from 1950s to early 1990s. Since then, that number has been declining. It was down to 14 million in 2008, the last time we had a crisis. Last year it was down to zero growth. This year will be the first year it is negative at -1.7 million and it goes down to -12 million (estimate) by the year 2030. And then it stays there until the early 2040s. So that’s the demographic picture.
- Lacy Hunt gave a great lecture about productivity and he explained why productivity is going to remain depressed.
- Economic growth (GDP) equals Productivity times Population Growth (demographics). When you take these two factors together, we will not see a lot of growth.
- Our economic system is built on growth. We need growth for the system to survive. So, when the pie doesn’t grow much, all of a sudden you have to fight for market share, and that’s what comes up in trade.
- First, one starts cheating with currency manipulation, then you set your products up in a way that benefits the local producer and then finally you have tariffs. That’s where we are today and this will get worse and worse over the next 10 years.
- That’s why we have entered the period of rising conflicts in trade and in geopolitics. This is compounded where a dominating power is being challenged by a rising economic power who also has a strong military – that’s China and the U.S.
- Over the last 500 years, we’ve had 16 such cases of which 12 ended in outright war, there were smaller wars (like Korea, Vietnam…) and one was a serious war (between Great Britain and the U.S.). So, we are moving into that sort of environment.
- Then we come to the business cycle. Many people believe the problem in the economy is coming from the trade conflicts, but this is not true. I saw the slowdown coming in late 2017 and put out in my publication to my clients and expected slowdown into the second half of 2019. And we are pretty much on track.
- The tariff and trade problems are just compounding the slowdown we are seeing.
- The slowdown is a result of overtightening in the U.S. and overtightening in China (because they have to restructure some of the excesses in the financial sector – they realize they can’t go on like this or they will run into even more serious problems).
- We have a classic slowdown in the world’s two major economies. And Europe heavily depends on China. Half of its growth over the last 10 years came from China directly and indirectly.
- The slowdown should eventually impact markets.
On the Fed and global central bankers: I just don’t think they understand markets and they make mistakes at the turning points. They are married to their (flawed) economic models.
- I don’t think they have lost control.
- The central banks will get even more powerful. Not in the effect they have on the economy but the effect they have on the markets.
- They will continue to print. But the economy is in a position (a condition) that cannot take that money to create growth. There is too much in debt.
- So, money will go into markets to inflate asset prices.
- And they, unknowingly, have widened the rift between the haves and the have-nots.
Bottom line: Felix sees a summer market high to then be followed by a 20% correction starting by the third quarter of 2019 and going into early 2020. It’s possible we will be at 0% Fed Funds rate by early 2020. The central bankers will respond aggressively, the market will bottom (after the 20% decline) and then rally. He sees big swings both up and down in the market over the next 10 years with no net gain in price. We are moving from a “passive investors’” market to “a trader’s market.” If you buy-and-hold, at best, you earn the dividend yield. He is also long some gold.
You can find the full Zulauf post here.
Concluding Thoughts – What Might The Endgame Look Like?
I thoroughly enjoyed the Mauldin conference and the time spent reviewing my notes and sharing them with you. Personally, it really helps me to think, write, pause, and think some more. Putting pen to paper helps me get unstuck when I’m stuck. Actually, it gets me on the phone with John and others to challenge a view and challenge my own views. “Tickets in a fish bowl.” Love that quote.
Next are my summary thoughts and personal views on the economy, interest rates and the stock market and how we may find a way out of the debt and pension traps:
As a starting place, I believe valuations are informative in terms of what returns are likely going to be over the coming 10 years. This is important as it shapes the odds for both return and risk. Zulauf sees wide swings in the market both on the upside and the downside and we end up in the same place we are today 10 years from now. No price appreciation. Best case is investors earn the current dividend yield 1.82%. I think that is about right, here’s why.
My Thoughts on Valuations and Coming 5-year and 10-year Equity Market Returns
The chart below looks at what Warren Buffett said is his favorite valuation measurement. It compares the total value of the stock market to Nominal Gross Domestic Income. Stock Market Capitalization is the number of shares a company has outstanding multiplied by its current share price. All U.S. companies are calculated and added together to get the total value of U.S. stocks. Think of Gross Domestic Income as what we collectively earn. When stock prices go up, the collective value of the market goes up and when you compare it to our collective income, you get a ratio to determine if prices got ahead of themselves (overvalued) or are cheap relative to our incomes (undervalued).
Ned David Research (NDR) tested the data back to 1925 and organized the ratio of stock market value to income into five quintiles (most overvalued to undervalued).
Here is how to read the chart:
- First focus on the bottom section of the chart. The red line tracks the ratio since 1925.
- Above the green dotted line is the top quintile or most overvalued in terms of stock market price to income. Below is the bottom quintile or where bargains are best. The red arrows mark prior peaks in valuation (1929, 1966, 2000, 2008 and today).
- Next look at the red rectangle in the upper left hand section of the chart. Focus in on the yellow circle. It shows the subsequent five-year return achieved when the ratio was in the top quintile (most overvalued) and was just 1.41%. That is the total return after five years meaning your $100,000 grew to just $101,410. Annualized, that is a compounded return of approximately 0.22% per year. Not good. The 10-year return was just 50.66%, which is an annualized compounded return of approximately 4.25%. Not so good.
- Now look at the subsequent 5- and 10-year returns when the ratio was in the bottom quintile (most undervalued). +123.87% average five years later and +367.36% 10 years later. Pretty great.
- NDR said that no indicator they have tested has done a better job historically at showing subsequent 5- to 10-year returns. We should take note.
Note, too, the returns when your starting conditions find you below the bottom dotted green line (bottom quintile – most undervalued). Your $100,000 grew to $123,870 five years later and $367,360 10 years later.
- If you look again at the red line in the bottom section of the chart, note the Stock Market Cap to Gross Domestic Income ratio hit the bottom quintile zone in 2009. The subsequent returns have been over 300%.
Clearly, there are better and worse times to invest in stocks. Bottom line: Today, our current starting conditions are not in our favor. The fact that the stock market is up 20% YTD does not mean such returns should be projected into the future. Stocks are richly priced. If Zulauf is right about a coming 20% correction that gets us back to zero gain on the year. A retest of the December 24, 2018 low? We’ll see. Perhaps a better entry point there…
Another of my favorite valuation measures looks at U.S. Household Stock Allocations. Meaning, are individual investors heavily invested in stocks. Think of it this way, if investors are “all in” on stocks, where is the next marginal buyer going to come from who will buy stocks and push prices higher.
The next chart shows the rolling 10-year subsequent returns of the S&P 500 Total Return Index vs U.S. Household Stock Allocation. When in the highest quintile, 10-year returns averaged 4.09% (return stats in the lower left-hand section of the chart. I’ve also indicated other secular bull market peaks. Investors are heavily invested in stocks at market tops. We currently sit in the highest quintile.
Here’s how to read the chart:
- The middle section tracks U.S. Household Stock Allocation and includes mutual fund and pension funds. The observation here is that individual investors are overweighted to stocks at bull market tops and underweighted at bear market bottoms.
- Note how under-allocated U.S. households were to stocks in 2009 at the market low (green/yellow circle with green vertical arrow). The lower section (red line) tracks the actual subsequent 10-year return. Over the last 10 years, the annualized return is above 15% (thin green arrow). A low percentage allocation to stocks means there is more buying power available to drive prices higher. Howard Marks’ advice, “Buy what is unpopular.”
- Finally, all five quintiles are scored up in the lower section and show the lowest 10-year subsequent return, the highest 10-year subsequent return and the “average” subsequent 10-year return. From a probability perspective, I’m focused in on the average. We could get a higher or lower result.
- Even quintiles 3 and 4 are pretty good average.
Corporate Share Buybacks
The biggest buyer of U.S. stocks has been U.S. corporations. If you wonder what has fueled the move the last two years, look at the spike in share buyback activity since 2018. Much of it was financed with newly issued debt. I’d suggest that this trend is unlikely to continue.
Of course, there are other potential buyers of U.S. stocks. Yet those categories, too, are heavily weighted to stocks. Foreign-held U.S. equities as a percentage of foreign-held U.S. financial assets was 27.6% at the end of Q1 2019. It’s a relatively high level of stock ownership. Likely higher when we get the June 2019 quarter-end data. In comparison to other secular bull market tops, it was at 32.6% in 1968 (the market peaked in 1966), 28.9% in 2000, 21.4% in 2007 and reached a high of 29.1% at the end of Q3 2018. By historical comparisons, foreign investors are currently overweight U.S. equities. Note, too, they held just 13.4% in 2009. A near-record low level.
Overall, stock ownership is high, yet there is room for more and one can’t rule out a mass exit of capital from Europe to U.S. equities should a European banking crisis erupt. This would create a melt-up scenario. Add into the risk equation that margin debt stands near a record high.
Bottom line: stocks are popular, investors are “all in.” More defense than offense, raise cash and have your stop-loss risk management rules in place.
I’m in the Hunt/Rosenberg/White/Zulauf camp. I believe the Fed Funds rate is heading to zero. The global economy is in recession, trade wars are adding fuel to the fire and the U.S. is likely to be in recession within nine months to a year. But with that said, my ‘go to’ chart on the direction of interest follows shortly below. In it I trust.
Global Recession Probability – A Global Recession has Started
Here is the probability of global recession. Bottom line: We may be in one and the U.S. is likely to follow. Expect the Fed to get uber-aggressive with rate cuts in the fourth quarter of this year into 2020.
Here is how to read the following chart:
- I’ve been posting this chart for months and I have been saying the global economy is likely in recession. Probability is high when in the “High Recession Risk” zone (above the dotted red line) in the chart below. That has now been confirmed (shaded grey).
- The process looks at the amplitude-adjusted Composite Leading Indicators (CLIs) created by OECD for 35 countries. Each CLI contains a wide range of economic indicators such as money supply, yield curve, building permits, consumer and business sentiment, share prices and manufacturing production. There are usually five to ten indicators, which vary by type and weight, depending on the country and are selected based on economic significance, cyclical behavior and quality. A hat tip to NDR.
U.S. Recession Timing
At the end of each month I post my four favorite U.S. recession signal charts in my Trade Signals blog. You can find them if you click the link in the Trade Signals section below. In summary, three of the four remain bullish, but overall the U.S. looks ok yet there is some deterioration. There are several early warning signs to note:
- First, last week the yield on the 30-year Treasury Bond was lower than the yield on the Fed Funds rate. That’s saying the patient has a very high fever. We may not yet know exactly what’s wrong in the body but something is wrong.
- Second, the 10-year Treasury Note yield remains lower than the 3-month Treasury Bill yield and has for at least a quarter. Every time that has happened in the past, recession has followed. (Though with an average lag of 14 months.) Since it first inverted three months ago, let’s say we have 11 months to the next recession. This too is signaling there is something going bad health-wise with the economy. We’ve gone from green to flashing yellow. We need to watch out for red.
The U.S. bond market is signaling there are problems in the economy. If the trade wars worsen as I expect, the stock market likely catches up to the bond market in signaling a much weaker economy. Usually, the bond market is first to get it right.
The Two Most Important Charts (In My View)
The High Yield bond market has done an excellent job historically signaling changes in the economy. In early June, I wrote a Trade Signals post called The Two Most Important Signal Charts (To Keep On Your Radar).
- The Trend in the HY bond market. A simple 50-day moving average price line can be used to signal a coming decline or coming advance in the HY markets price trend. There are several false signals along the way but HY is a very good leading indicator for the stock market and both are leading indicators for the economy.
- The NDR Credit Conditions Index. When credit conditions are favorable (available liquidity in the system), companies living on debt can continue to find more money to borrow. When credit conditions turn unfavorable, they cannot. That’s when defaults will spike.
So keep a close eye on both charts. Click the link above and scroll down to the “Commentary” section. I explain how you can track this on your own. I’m keeping it On My Radar.
The global economy is in bad shape and the U.S. economy has ticked lower. No alarm bells just yet. I do believe the bond market is signaling there is a problem. I expect the Fed to aggressively cut the Fed Funds rate to zero by early 2020 and it is possible the U.S. economy will be in recession at that time. I believe the stock market is way ahead of itself (overvalued as shown above) and has not yet focused in on the global economic weakness. I expect the corporate sector will continue to reduce their earnings guidance. The global economy is weak. China has been the main driver of the global economy over the last decade. China is weak and can’t stimulate its way out like it did in the past. Trade wars are adding fuel to the fire. I see a short-term peace treaty as U.S. elections are next year but no real solution.
I expect corporate earnings will disappoint and may be the trigger for a meaningful stock market sell-off. Historically, markets do well in anticipation to the first rate cut. That’s been the case this time. The Powell December pivot was the beginning and it looks like the Fed will cut rates 25 bps in July. Stocks then fall over as it becomes clear the economy is worse than anticipated and recession is likely. As noted, the stock market is a good leading indicator of recession. The normal decline from start to recession low is more than -30% range. The last two got us -50%. I don’t see -50% this time as I believe Fed intervention, along with the global central bankers, keeps the decline to -20% (back to the December 24, 2018 low) then we rally again… but this is just a guess. I believe the Fed will take aggressive action and provide a floor for the market.
This will be a good environment for long-term Treasury bond exposure and not so good for most everything else. Passive cap-weighted funds and ETFs will struggle over the next 10 years. Active management will come back in form and it will be a good environment for talented, long/short managers.
If you have to own equities, overweight to high dividend paying stocks whose management teams have a history of increasing their dividends with yields in the 3.50% to 4% range. Such companies tend to be value plays and value has been the unloved step-child for a number of years. It reminds me of 1999. Post 1999, value-oriented stocks went on a ten-year outperformance and produced good returns when the tech bubble crashed between 2000-2002. Howard Marks said it best, “[I]f you could say well give me one rule to follow as an investor, just one, it would be, do the things that are unpopular. Everything else being equal, the things that are popular are overpriced the things that are unpopular are underpriced.”
I also recommend diversifying to trading strategies. I picked my head up when David Rosenberg, at Mauldin’s SIC, recommended the same idea. If you were 60% equities, perhaps reduce it to 30% and allocate 30% to a handful of experienced trading strategists. Each week I post a number of simple trend rules in Trade Signals, such as the 50/200 day moving average and a simple moving average on the S&P and the QQQ. Absent other more sophisticated processes, these are effective ways to risk-manage your equity market exposure. None are perfect but all are good. That’s why I favor using more than one. Better diversification. The link to Trade Signals is located below.
In fixed income, I like long-term Treasury bonds like Lacy Hunt’s mutual fund but favor using a trend following process to risk-manage the exposure. Here is my go-to trade signal for high quality fixed income: the Zweig Bond Model. You can find it posted each week in Trade Signals. It helped me in 2015 and 2016 when everyone was calling for higher interest rates. It’s been long bonds all year. Many years ago, I asked Ned Davis Research to resurrect the work the late, great Marty Zweig and Ned Davis did in the early 1980s. It’s my go-to process for understanding the intermediate direction of interest rates and high quality bond prices. You can calculate the model on your own – detailed in the upper left section of the chart. How to Track the Zweig Bond Model. Click here for more info about the Zweig Bond Model.
I’m often asked about gold. My two cents: Gold looks to have made a meaningful breakout. In my view, I would consider overweighting to gold. To me that is a 5% or 10% portfolio position.
Finally, there are always special investment opportunities. I recently invested in a venture fund focused on healthcare. If you’ve been following me, you know the story about my father and Parkinson’s disease. There is a company just coming out of a Phase 2b trial and the results are outstanding. A recent investment round closed so there is no current investment offering but a Phase 3 trial is expected in the near future and additional funding may be required. A several hundred million dollar company with the potential for several billion in annual drug sales (just to solve Parkinson’s-related constipation issues). However, the drug shows far more promise than curing constipation. If you are an accredited investor and interested in staying up to date or if you have a loved one suffering from Parkinson’s, shoot me a note and I’ll share information when it becomes publicly available. Go to www.enterin.com to learn more. Overall, I like investing 80% into liquid core types of strategies and 20% allocated to special situations and diversify that bucket to four of five opportunities. They tend to not be liquid. Make sure you have a deep and trusted network to source special ideas. They don’t come along too frequently so be selective and do your homework.
What Does the Debt End Game Look Like?
I believe we find a way to monetize the debt. We are headed for a “debt jubilee” of some form. I see no other way out. It will happen in the U.S., and in the balance of the developed world, and we likely do it in a coordinated way. First, rates go to zero percent, maybe even negative in the U.S. We’ll likely try it. We’ll get even more aggressive with QE. When it is clear that we can’t convince those in debt to borrow even more debt, we’ll need legislators to come together and enact laws that enable the Fed to print and buy and monetize away the debt — first government debt and then maybe even corporate debt and other problem areas. Morally, it creates many hazards but it is what I believe we will do. In the end, there will be inflation and we’ll have to adjust portfolios for that environment. This will take a decade or so to figure out. It is going to be an up and down bumpy ride.
This concludes the Mauldin Conference series of notes. I hope you found the information helpful. Thanks for reading… if you find the information in OMR helpful, please share the link below with a friend. They can sign up to receive my free On My Radar letter here.
Trade Signals – Equity Markets Set New Highs on Expectations of Rate Cut; Increased Chance of US Recession?
July 10, 2019
S&P 500 Index — 2,989
Notable this week:
The broad market averages (DJIA and S&P 500 Index) continue their record runs and set new highs, as investors expect a near-term interest rate cut. Federal Reserve Chairman Jerome (Jay) Powell signaled an openness to a rate cut, notwithstanding ongoing uncertainty in the economy. Chairman Powell is testifying before Congress on the economy and policy outlook today and tomorrow. Our view is investors should remain cautious due to geopolitical issues (e.g., trade wars and Middle East tensions), extremely high equity valuations, and economic uncertainty.
No material changes to our trade signals this week, however the Ned Davis Research (NDR) Crowd Sentiment Poll moved to Extreme Optimism, which is typically short-term bearish for equities.
Of course, we continue to diligently monitor domestic and global recession indicators. Last week, the New York Federal Reserve Bank published an update to their recession probability index, indicating an increase in the probability of a U.S. recession in the next 12 months. It’s important to note that, every time since 1960 that this index breached 30%, a recession occurred.
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.
Personal Note – SF and LA
Son Kyle is doing a summer internship in Los Angeles. I fly to San Francisco to visit with a close advisor friend and then to LA next Tuesday. I’m really looking forward to seeing Kyle and celebrating his birthday with him. Meetings follow on Wednesday, Thursday and Friday then home late Friday evening. I’ll be writing OMR from a hotel room in sunny California.
Kyle and Steve
Some golf is planned this weekend. I’m hoping Susan will join me for nine holes tonight along with our dog Shiloh. Then we will enjoy some yummy wine.
Wishing you well. Have a great weekend.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
If you find the On My Radar weekly research letter helpful, please tell a friend … also note the social media links below. I often share articles and charts during the week via Twitter and LinkedIn that I feel may be worth your time. You can follow me on Twitter @SBlumenthalCMG and on LinkedIn.
I hope you find On My Radar helpful for you and your work with your clients. And please feel free to reach out to me if you have any questions.
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.
The objective of the letter is to provide our investment advisors clients and professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and client communication.
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AdvisorCentral is being updated with new educational resources we look forward to sharing with you. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.
A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
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