November 26, 2021
By Steve Blumenthal
“I have no doubt that we are in a raging mania in all assets,”
Stan Druckenmiller told CNBC in May.
“I also have no doubt that I don’t have a clue when that’s gonna end.”
― Stanley Druckenmiller,
American investor, hedge fund manager, and philanthropist
Picture the investment arena like a game of chess. There are rules involved. Your pawn can move forward one square, knights can move in an “L” shape, bishops can move diagonally any number of squares, and queens are powerful with freedom to move across the board. You get eight pawns, two bishops, two knights, two rooks, one queen, and one king.
You can learn how to play the game in a few minutes, and it’s easy to learn; however, it takes a lifetime to master. Lots of people learn chess, but few master the game. It is this challenge that attracts many people to it. Investing is similar.
Lots of people learn investing, but few master the game. Ray Dalio, Stanley Druckenmiller, Dr. Lacy Hunt, Felix Zulauf, Sam Zell, and Howard Marks are grandmasters. There are others, of course. I like to know what these great thinkers are thinking and how they are positioning their personal wealth.
To improve at chess, it is best to learn and study from the best. Same with investing. Fortunately, the above experts are honest, transparent and provide all of us access to their views.
Every so often, Howard Marks writes a new “Memo.” His latest one hit my inbox this week. Thanksgiving morning, I grabbed a coffee, found my favorite chair (next to Susan), and read, “The Winds of Change.” (You can find the full memo here. And you can subscribe to Memo’s From Howard Marks here).
Knight to F2. The move was played, President Biden appointed Jerome Powell to another term as Fed Chairman. Important implications… What follows next is from a section of Marks Memo:
The Role of the Fed
I won’t spend a great deal of time on this subject since everyone knows the story. But it has to be part of a memo that purports to discuss important changes that are underway.
Historically, the job of central banks has been to control the level of inflation and make sure the economy grows fast enough to create “full employment.” In recent years, however, the Fed seems to have taken on the additional task of keeping the securities markets on an upward trajectory. This has been achieved through the radical lowering of interest rates and the injection of massive amounts of liquidity into the economy.
The Fed funds rate – the bellwether of short-term interest rates in the U.S. – was reduced to zero for the first time during the Global Financial Crisis of 2008-09. And it worked – what followed was the longest economic recovery in U.S. history. But rates weren’t raised when the recovery was at its strongest, and when they finally were raised in 2017-18, the markets threw a tantrum and the Fed backed down, cutting rates instead.
Now the Fed funds rate is zero again, the markets are far higher than they were in the last decade, and we’re seeing serious inflation. The Fed has announced that it’s going to “taper” its stimulative program of bond buying, and it is widely expected that it will begin to raise interest rates next year. Will the impact on the economy be highly negative? Will the markets revolt again, and will a market correction convince the Fed to go back to a low-interest-rate regime? Will the Fed keep asset prices rising in perpetuity as the optimists think is now its job?
For me, the expectation that the Fed can keep the economy and markets rising without interruption is too good to be true. And I continue to believe the economy will perform best in the long run if it’s a free-market economy, which does the best job of moving resources to their optimal use. As Richard Masson, my Oaktree co-founder, wrote in 2008, “Creative destruction and a functioning market economy assure change toward the best solution over time.” We could use a free market in money.
Larry Goodman, president of the Center for Fiscal Stability, recently wrote as follows:
Since , Fed purchases of Treasury debt have funded as much as 60% to 80% of the entire government borrowing requirement. In other words, Fed actions have crowded out private-sector price discovery for more than 10 years, pushing yields to lows and stock prices to record highs. . . .
In fiscal 2021, the Fed purchased $1 trillion in Treasury debt, and the Treasury drained $1.6 trillion from its savings account at the Fed. These actions covered nearly the entire budget deficit, equal to . . . nearly all the pandemic-related government borrowing. Based on monthly estimates, there was actually a funding surplus this past summer. It is no wonder the 10-year Treasury yield reached a low of 1.17% in August despite high inflation rates. (The Wall Street Journal, November 18, 2021)
So guess what: The U.S. is still able to issue debt at low interest rates, a ringing endorsement of its creditworthiness from buyers. And who’s the main buyer supplying that endorsement? The U.S.
By the way, a few progressive Democrats have announced their opposition to the reappointment of Jerome Powell as Fed chair, because they think he’s not active enough in addressing climate change. So now we have a Fed that’s supposed to control inflation, foster growth, and employment, support markets, and fight climate change. How many roles can one institution have and still maintain a coherent effort?
That concludes Howard Marks comments about the Fed. There is much more to gain in reading the full memo. He talks about China, the growing divide in our country, inflation and deflation, the changing nature of business, and more. I particularly appreciate his balanced and humble way. The investment game is the most complex of all games. And all grandmasters are prone to make mistakes. One rule they’ll all agree on is investing appears to be easiest when risk is greatest, and few want to play it when it appears to be hardest, yet that is when risk is least. Wednesday’s Trade Signals follows next.
Trade Signals – Happy Thanksgiving
November 24, 2021
Posted each Wednesday, Trade Signals looks at several of my favorite equity markets, 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:
With the re-nomination of Jerome Powell as Fed Chair, and the increased inflation concerns from the Biden Administration, the probability of one Fed rate hike by June 2022 rose to 75% this week. The probability for two Fed rate hikes rose to 46.6%.
There are no significant changes in the Trade Signals – Dashboard of Indicators. The trend in the bond market remained mixed to bearish. The Zweig Bond Model is in a buy signal for high-grade bonds while High Yield and the 10-year Treasury MACD are in sell signals. The trend in the U.S. equity market indices remained bullish. A notable divergence, typically at cyclical market peaks, is the ratio of advancing stocks to declining stocks. During November, the number of losing stocks on the NYSE outnumbered the number of winning stocks. Fewer stocks are carrying market indices higher.
Friend David Rosenberg said it best in his “Breakfast with Dave” morning research note this week,
“There are many things that stand out in today’s stock market, but what is most egregious (and dangerous) is the extreme level of market concentration — the top 5 stocks collectively account for 25% of the market cap.”
Finally, the number of losing Turkey’s outnumbered the number of winning Turkey’s. I hope today’s note finds you surrounded by your family.
Wishing you and your family a warm, happy, and healthy Thanksgiving together.
Click HERE to see the Dashboard of Indicators in 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 – Family Time
I hope today’s note finds you comfortable, happy, and exercising off some of yesterday’s Thanksgiving calories. If you are a morning coffee person, look for the “Coffee and Piano” playlist on Spotify. It’s peaceful…
I’m grateful for the time you spend with me each week. Thanks for reading!
Have a great week.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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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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