July 2, 2021
By Steve Blumenthal
“We learned a long time ago…
that you can’t make a good deal with a bad person.”
– Warren Buffett,
Chairman and CEO of Berkshire Hathaway, Investor, and Philanthropist
As you ease into your long holiday weekend, I thought I’d share with you two presentations. The first is on bubbles from Ray Dalio, one of the most successful investors of our time. The second is “A Wealth of Wisdom” from the brilliant investor Charlie Munger and Warren Buffett. I really enjoyed listening to Munger and Buffett and hope you do too.
Are we in a bubble? Before I watched Dalio’s short “Is the Stock Market in a Bubble?” presentation, I would have put my money on YES. But he argued that while certain stocks (namely, emerging technology stocks) are in a bubble, the market as a whole is actually “frothy.” I think he is right.
One of my bubble charts looks at how far current price is from the long-term trend. I last shared the following chart with you in May. It considers the current price of the S&P 500 Index in terms of whether current price is above or below the long-term price “real trendline.” It can serve as a guide of sorts as to when to play more offense and when to play more defense. I think of it like this: Are the odds more or less in our favor in terms of coming returns and degree of risk? It’s signaling more defense today.
Here’s how to read the chart:
- The orange line in the middle section plots the Real S&P 500 Index back to the 1920s. “Real” means the price line is adjusted net of inflation.
- The dotted light blue line plots the long-term real trendline.
- The lower section (light blue line) plots how far above or below the orange line is from the dotted blue long-term trendline.
What makes this chart valuable is the data box in the upper left-hand side of the chart. It is easy to see that current price is far above trend (the solid red horizontal line in the lower section of the chart), as it was in 2000. The only period higher was in 1929. And the current deviation from the trend is higher than it was in 2007.
In his short video (link below), Dalio is saying tech is mostly in a bubble––but other areas are not. It’s kind of hard to bet against that guy. In addition to insights from Dalio, Munger, and Buffett, you’ll find the latest Trade Signals dashboard below. The trend remains bullish as we enter the seasonally more challenging July–October time of year. Channel your inner Art Cashin: “Stick with the drill—stay wary, alert and very, very nimble.”
I hope this note finds you on a beach with ear buds plugged in and a cooler by your side. Grab your favorite beach chair and an ice cold beer. Happy Fourth of July!
- “Is the Stock Market in a Bubble?” by Ray Dalio
- On My Radar: Navigating Stock Market Cycles
- Link to Buffett and Munger CNBC “Wisdom” Interview
- Trade Signals – The Great Art Cashin: “Stick with the drill – stay wary, alert and very, very nimble.”
- Personal Section – Leadership
“Is the Stock Market in a Bubble?”
by Ray Dalio
Six Conditions That Make a Bubble
In this short 10-minute YouTube video, Ray Dalio, shares his thoughts on how he measures stock market bubbles. As he puts it, “I’ve watched a lot of bubbles over my something like 50 years of investing and I basically thought there was six things that make a bubble.” Ray applies six bubble conditions to individual securities to gauge the aggregate percentage of stocks in a bubble. He then compares today’s “total stock market” and “emerging tech” stocks to the roaring 1920s, the dot-com bubble, and 2007––much the way I did with the NDR deviation from the long-term real trend above.
Ray concludes that emerging tech stocks have checked three of the six “bubble” conditions and the other three are “frothy”––the condition one notch below “bubble.” The total market in general is not yet in a bubble.
In this next USA Aggregate Bubble Gauge Percentile chart, he has circled the late 1920s and 2000. Current conditions are at the far right of the chart showing nearly 80% of stocks are in a bubble. Bottom line: It’s high and also higher than 2007, but not as high as some prior periods.
(SB side note: What I’m patiently waiting for are periods like 1980, 2001–02, and 2009–11. They present when leverage unwinds. We sit at record high margin debt and stupid things are occurring, like the Archegos Capital collapse in March 2021 when they defaulted on margin calls. Archegos was run by Bill Hwang. Hwang used swaps, a type of derivative that gives an investor exposure to the gains or losses in an underlying asset without owning it directly. This concealed both his identity and the size of his positions. Even the firms that financed his investments couldn’t see the big picture. Credit Suisse lost more than $5 billion and Nomura lost $3 billion.
- From Bloomberg: “That’s why on Friday, March 26, when investors around the world learned that a company called Archegos had defaulted on loans used to build a staggering $100 billion portfolio, the first question was, ‘Who on earth is Bill Hwang?’ Because he was using borrowed money and levering up his bets fivefold, Hwang’s collapse left a trail of destruction.”
- My point is to think about leverage from the perspective of where we sit today. And think about that in terms of Dalio’s rule number 5.
- Last point: Do you remember when the Bear Stearns High-Grade Structured Credit Fund collapsed in July 2007? “High-Grade” invested in leveraged credit default obligations and credit default swaps. They were invested in leveraged subprime mortgages. The stock market peaked later in 2007, but didn’t collapse until late 2008. Just saying, leverage is what always blows things up. Is Archegos the Bear Stearns canary in the coal mine? We’ll see…)
Dalio shares a few more charts. According to the six criteria, a lot of stocks are not in a bubble. You can see they’re not as high as 2000, but higher than 2007.
This next chart shows the “bubble” stocks. Dalio put together an index of just the bubble stocks and compares their performance from January 2020 to today vs. that of the S&P 500 index. You can see that the bubble stocks have started to break down. He added that bubbles can expand and contract and timing bubbles can be a challenging issue.
This last chart is one of my favorites from his presentation. It goes back to 1900. The top section shows debt to GDP and the blue line in the bottom section plots interest rates. The red line shows the printing of money and the surge in the supply of money after the last two periods in history when interest rates hit 0 percent.
- What you see is that when we have a lot of debt and debt is increasing, combined with interest rates hitting 0, what follows is the printing of money and that is a key element of bubbles. Why? It provides a lot of liquidity that enters the market and bids up all sorts of assets.
You can see when the blue line hits zero interest rates (1930 and 2008 and since).
Bottom line: Dalio says, “You can’t say the stock market is in the highest bubble, and you can’t even say it is necessarily in a bubble; you have to distinguish which stocks are in a bubble from those that are not in a bubble.”
If Dalio is right, then the period ahead likely favors active management, stock pickers, and areas of the market that provide value.
On My Radar: Navigating Stock Market Cycles
My book, On My Radar: Navigating Stock Markets Cycles, was published by ForbesBooks and released earlier this year. I recently learned it is now an Amazon Best Seller. I’m really happy about that…
For a short period of time, ForbesBooks has agreed to offer the Kindle version for just $0.99 cents. I could be wrong, but do believe a decline of 50% or more is coming, and that there are some simple things we can do to both grow and defend our wealth. It’s not about making book money for me. It’s about defending wealth, especially if you are nearing retirement or in retirement.
If you are interested, click on the picture below to purchase the book. And please let me know what you think!
Link to Buffett and Munger CNBC “Wisdom” Interview
If you have some free time this weekend, this interview with Charlie Munger and Warren Buffett is outstanding and worth a listen. Plug in, take a walk, and take it in.
Trade Signals – The Great Art Cashin: “Stick with the drill – stay wary, alert and very, very nimble.”
June 30, 2021
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
Notable this week:
Interesting data from S&P Global this morning, “As you’ve probably noticed, it’s been a great first half of the year for U.S. equities, with the S&P 500 standing up by 14% in price terms while its 125-year-old big brother, the Dow Jones Industrial Average®, has gained 12%. Based on the full live history of the quasquicentenarianbenchmark, that should be sufficient to ensure an “up” year overall: on the 24 historical occasions that the DJIA gained between 10% and 20% in the first half of the year, only once did it fail to finish the full year positively. On the other hand, that one time was 1929: still the worst-ever entry point for U.S. equities in history.” (Source: Tim Edwards, S&P Global 7-1-21 Daily Dashboard.)
Take a look at the “Between 10% and 20%” bars. Of course, a repeat of 1929 is a low probability.
Next is a look at the Trade Signals Dashboard. Green dominates the board. The short-term, medium-term, and long-term trend signals remain bullish for equities and fixed income.
The Zweig Bond Model turned bullish a few months ago and continues to signal declining interest rates (rising bond prices). The Don’t Fight the Tape or Fed moved to a bullish +1 signal this week. Everyone is bullish, margin debt is at record high, and margin debt to GDP is at the highest level in history. This is EUPHORIA.
As my friend Art Cashin famously says, “Stick with the drill – stay wary, alert and very, very nimble.”
Trade Signals — Dashboard of Indicators
(Green is Bullish, Orange is Neutral and Red is Bearish)
Click HERE to go to the balance of Wednesday’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 – Leadership
Padraig Harrington teed off on the 18th hole with a one shot lead over Sergio Garcia at the Open Championship at Carnoustie Golf Links in Scotland. He’d been steady all day until his tee shot swerved right and found the water. A one stroke penalty. He took his drop, had a clean lie, and instead of playing it safe and laying up, he went for the green and found the water short of the green.
The crowd of 30,000 was stunned. He was feeling lost and confused and certain he’d lost the Open as he made his way to the next shot. But his caddie, Ronan Flood, kept repeating to Padraig, “You are the greatest chipper and putter in the world, you are the greatest chipper and putter in the world, you are the greatest chipper and putter in the world.” Padraig needed to chip his fifth shot close and sink the putt to score a bogey six on the hole. Doing so would put in a potential tie for the lead with Garcia.
Ronan continued until Padraig approached his ball, “You are the greatest chipper and putter in the world….” His confidence returned and Padraig hit the 45 years chip shot to within a few feet of the hole and sunk the putt.
Garcia parred the difficult 18th, forcing a four-hole playoff with Padraig. Padraig went on to win becoming the first Irishman to win a major championship since Fred Daly in 1947. It takes a team….
The funny part of the Padraig story came at the end. After the trophy celebration and interviews, Padraig and his caddie Ronan were in the back seat of their car. Padraig looked to Ronan and thanked him for believing in him. He said to Ronan, “I didn’t think I would win.” Adding, “You believed in me and knew that I could win,” he said.
Ronan smiled at him and said, “After putting two balls in the water, I didn’t think you would win either.” They both laughed!
The 149th Open is coming up in a week and will be played at Royal St. Georges in Kent, England. I’ll be tuning in.
My chipping and putting have been suspect until recently. After I listened to Padraig share his story on a podcast, I’ve been saying those same affirmations to myself (both in my head and out loud). “I am the greatest chipper and putter in the world.” The out-loud part makes my children think I’m nuts, but it’s working! I see improvement. Positive affirmations are important.
Susan is in Tampa, Florida, this weekend with her club soccer teams competing at the National Cup Soccer Championship—U.S. club soccer’s championship. Her second-division team qualified for the top-level championship, and they face off against the number-one ranked team in the country today. “I believe I am the greatest goal scorer in the world, I believe I am the greatest goal scorer in the world,” said someone on her team, I hope. Go Penn Fusion! Vegas odds have them as a three-goal underdog. The win is creating, the win is the journey, the win is doing it with people you love and enjoying the experience along the way.
I’ll be golfing with Matthew and Brie and on the front nine, with IPA in hand, by the time this OMR hits your inbox. And there’s more golf ahead this weekend. I’m sure I’ll be telling myself, “I am the greatest chipper and putter in the world.” Look out Matt, I’m coming for that $20 I Venmo’ed you last week!
Wishing you a fun-filled holiday weekend. Happy Fourth of July!
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.