October 13, 2023
By Steve Blumenthal
“To push the point home, I want to make clear that I believe that we are in that brief part of the Big Cycle when the conflicts are heating up, and the leading powers still have the ability to choose between crossing that line into brutal war or pulling back from the brink.”
– Ray Dalio
My heart and prayers go out to the innocent victims of the tragic events in Israel. I’ve started this letter nine times today and can’t finish it. I’ve listened to Paul Tudor Jones and Andrew Ross Sorkin on CNBC, which echoed Ray Dalio’s latest LinkedIn missive, “Another Step Towards International War,” and read Zulauf’s research update and several other pieces from global macro thinkers I respect. I can’t get it done today.
This is about humanity. I’m overwhelmed with emotion. I need time to think.
Grab your coffee and find your favorite chair. If you are interested, you’ll find a few links below. On the light side, you’ll find a short story about one of the young men on my wife Susan’s high school soccer team, along with a team update in the Personal Section. All the best to you and yours. Praying for peace!
Here are the sections in this week’s On My Radar:
- Another Step Toward International War, Ray Dalio
- Paul Tudor Jones – Ian Bremmer – Tom Friedman (CNBC)
- Personal Note: Concerned
- Trade Signals: Weekly Update, October 11, 2023
(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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Another Step Toward International War, Ray Dalio
Ray Dalio, “…we should recognize that these two hot wars (the Israel-Hamas war and the Russia-Ukraine war) are not just between the parties directly involved in them—these wars are part of the bigger great power conflicts to shape the new world order—and they will have big effects on the countries who are allies and enemies of the four sides in these two seemingly irreconcilable wars. These two wars will cost the allies of these countries a lot. For example, the US is now fighting proxy wars in Europe and the Middle East while preparing for war in East Asia. As these wars spread, they will cost more.
Fortunately, the progression toward a world war between the biggest powers (the US and China) has not yet crossed the irreversible line from being containable (which it is now) to becoming a brutal war between the biggest powers and their allies. If these major powers do have direct fighting with each other, in which one side kills a significant number of people on the other side, we will see the transition from contained pre-hot-war conflicts to a brutal World War III.
To push the point home, I want to make clear that I believe that we are in that brief part of the Big Cycle when the conflicts are heating up and the leading powers still have the ability to choose between crossing that line into brutal war or pulling back from the brink.”
Click on the blue link below.
As you know, I view major developments like last weekend’s shocking and horrible events in Israel as part of an unfolding story that reflects how the world order is changing in ways that are remarkably similar to the ways it has changed many times before. That is because the most important cause-effect relationships between events remain the same. I laid out these relationships in my book and animated video, Principles for Dealing with the Changing World Order, and in the posts I share on social media, I put major new developments in the context of the perspective that I gained by studying history in that way and by getting as much input as I can from many smart, informed people. In this latest post, I do that for the Israel-Hamas war.
Not a recommendation to buy or sell any securities. Opinions expressed may change at any time.
Paul Tudor Jones
*Click on the photos.
No Random Tweets this week. 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: Concerned
I try so hard to keep politics out of my writing. We all have diverse views, and I respect yours and others, whether we agree or disagree. It’s what makes us a democracy. It’s what makes us smarter. This letter is about markets and investing and understanding how various events impact economic systems. I hope to provide honest, straightforward guidance with integrity. I’ve been wrong before, and I’ll be wrong again. My promise is always to give you my best.
As stewards of capital, we all vote with our money. Innovation and progress depend on us. On the whiteboard on the wall in my office desk is a saying, “Doing well by doing good.” That’s how I want to spend the remaining years of my life—helping to advance longevity science, genomics, health care, and new technologies. Venture capital investing is exciting. I don’t want governments deciding who to fund. It is best if it is you and me and others. Given a choice, I choose a free world with the rule of law, freedom of speech, a robust education system, and a deep capital markets structure.
Democracies aren’t perfect and ebb and flow from one extreme to another and back into balance again. We reach a point where we have to decide, “Is this who we wish to be?” We are near that point today. I have confidence that the core values of democracy will help us find our way back into balance. Do you trust the current legal system? Do you trust our legislators? Do you trust the press? We are off-center in the U.S. today and much of the world. I’m concerned.
How many of us in the free world wish to live under a dictatorial autocratic regime? The U.S. needs to come together; the free world needs the U.S., and we in the U.S. need our friends and allies. I’m confident we’ll come together.
The near-term economic/investment framework looks like this:
- Too much debt and an acceleration of debt are stressing economies.
- Inflation has forced the Fed’s hand. Higher rates and rising bond yields are poison for budgets.
- Rising rates are causing problems in the system somewhere. We expect something to break—i.e., Regional banks, Credit Unions, or something else.
- Inflation and higher rates are impacting the system. COVID cash is gone. Expect the economy to weaken.
- All of this is a headwind for overvalued equity markets.
- A weaker economy means inflation and interest rates will likely decline—the end of inflation wave number one.
- The next market dislocation, which could see equity prices drop 20%, will cause the Fed to change direction.
- That should stimulate asset prices and cause a new bull market in stocks- the beginning of inflation wave number two.
- A system-wide debt and pension system restructure sometime in the decade’s second half.
- Nobody can know anything for sure—it seems everything is happening more quickly—data-dependent, as they say.
Coach Sue and the Team
It was a mixed week for Susan’s high school boy’s soccer team: a loss and a win. The Friars sit at four wins, six losses, and one tie. The goal each year is to win the competitive Inter-Act League. They play an excellent soccer style; it’s fun to watch, but they are not finding the back of the net—just one goal in the three Inter-Act League games. The Inter-Act League matters most for the team: six teams and ten games (one home and one away for each opponent). The team has much work to do. They sit 0-3 in League play with seven games to go. Coach Sue takes each loss to heart. The next big game is 9:30 a.m. tomorrow. There will be a lot of excitement on campus – it’s Homecoming.
It was Senior Day this past Thursday, and eleven boys and their parents were honored before the game. This year is Coach Sue’s fifth senior day, and this is the first year this group has been with her for all four years. I’ve moved from watching from the stands to sitting beside Susan on the bench. She has a saying that you can only take something out if you put something in. Give them love, let them know you believe in them, and let them know you care.
One of the boys, a captain this year, is a beautiful story. Last year, after appropriately being red-carded (removed from the game) for aggressive, unsportsmanlike behavior, he paced the sidelines enraged and couldn’t calm down. It wasn’t the first time. You can’t put the fire in someone’s belly, but with the proper support, you can help him channel it for the positive. The coach and the school got behind him. It is a joy to see who he is today. This same young man, four years ago, before the start of the season, called Coach. He wanted to know which seniors graduated. Sue was curious. He told her he wanted to know which position was open so that he could train to win that starting spot. No ninth-grader has the guts to ask that question. Coach smiled and wondered, “What do we have here?” Very few first-year students make varsity. Even fewer become starters. What courage he had to make that call.
He started that first game in ninth grade and every game since. He was voted a team captain by his peers and is a superb leader. You should hear him in the pre-game huddle and again at halftime. And again after the game. He’s matured on the inside and tamed the fire without losing the fire. It will serve him well all his life. I’d hire the kid.
Hug your children. They are learning, and so are we.
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Trade Signals: Weekly Update, October 11, 2023
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Equity markets rose for the fourth straight day, with the S&P 500 Index up 0.43%. The NASDAQ closed 0.71% higher despite today’s hotter-than-expected inflation reading. Comments from Fed officials helped the markets: Fed Governor Waller said the FOMC can take a more cautious approach to future hikes while Atlanta Fed President Bostic said no additional tightening will be necessary unless inflation picks up again. Despite the hotter inflation, the yield on the 10-year moved lower, closing the day at 4.60%. It traded as high as 4.80% last week.
- The Zweig Bond Model and the 10-year Treasury Yield Weekly MACD continue to signal higher interest rates.
Tomorrow brings the U.S. CPI, and weekly jobless claims. Notable signal changes this week:
- The short-term Daily S&P 500 MACD, International Developed Markets, and Emerging Markets trend indicators are bullish.
- The short-term Daily U.S. Dollar MACD trend signal turned bearish.
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With kind regards,
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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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