CMG Capital Management Group

This week’s On My Radar is an investment outlook piece. While current trend evidence remains bullish, you’ll see valuation data below that tells us the coming 7-, 10- and 12-year equity market returns are not so good. Your and my clients are expecting 10% forward returns; however, due to extremely high valuations they are likely get 0% to 2%. Trouble spots? There are many.

President Donald J. Trump nominated Jerome Powell to be chairman of the Federal Reserve Board. If confirmed, Governor Powell will replace Janet Yellen in February. Powell is smart, well-liked and respected by Republicans and Democrats alike.

“Don’t Fight the Tape or the Fed!” It is one of investing’s “golden” rules and is perhaps never more true than it is today. The Fed, ECB and BoJ own one-third of the global bond market. One-third! Pause, put finger to chin and wrap your mind around that one.

It remains a decidedly risk-on environment. Interest rates are higher, the dollar is higher and the stock market is higher. The positives for higher equity prices are the liquidity coming from global central bankers, the potential for the repatriation of offshore corporate cash...

Long-time readers know I’m an avid Ned Davis Research fan. I’ve been a loyal client since the 1990s. Ned Davis built a fact-based, technology-driven research organization. Some years ago, Ned wrote a book titled, Being Right or Making Money and I believe that title sums up NDR’s investment research culture.

Yet this is not the mood in which bull markets typically end. Central banks around the world have purchased approximately $15 trillion of financial assets since the great crisis. Outside of the U.S., the BOJ and ECB are still buying.

I’d like to take you to two places today. One is life and the pursuit of dreams. “I was born with a silver spoon in my mouth,” legendary Coach Lou Holtz begins. “You have to have something to hope for and something to dream about.” It is a six-minute happy pill. I watched it with my kids and they loved it. You’ll love it too, I promise.

Bottom line: Those foreign central bank purchases translate to a vast sea of liquidity supporting stocks. Hartnett calls it the “supernova of liquidity” and “the flow that conquers all.” My motivation and title for today’s piece.

Last week, investors were lamenting the lack of inflation. This week, they’re fixated on its rise. On Thursday, data showed consumer prices climbed 0.4% in August from a month earlier and 1.9% from a year earlier, a sign that inflation is once again on the upswing after months of soft readings.

I’m writing to you from Chicago where I am attending the Morningstar ETF Conference. Vanguard’s global chief economist, Joe Davis, kicked off the event Wednesday evening advising investors to expect lower returns and rocky markets for the next two to three years.

The car is loaded with clean clothes and dog food. I’m heading out mid-morning to help load a support truck headed for Houston. Thankfully, my kid’s school has organized the donation drive. It has been heartwarming to watch the countless random acts of kindness in the wake of the current challenges. Much more will be needed in the days ahead.

This week the Federal Reserve Bank of Kansas City is hosting its annual Economic Policy Symposium in Jackson Hole, Wyoming and a number of Fed officials have commented on “inflation.” Why is targeting inflation so important? Because rising inflationary pressures will cause the Federal Reserve to raise interest rates and such periods tend to prove challenging for the stock and bond markets.

My thinking is impatient and mostly critical as I sift through research each week. I’m sure my “get to the point” personality frustrates my co-workers and I’m sure at times my beautiful wife. It’s a personality flaw, I know; but hey, I’m just not sure any amount of therapy can help.

Atop the “what matters most” list is debt. Specifically, global sovereign debt: U.S., Europe, Japan and China. We are at the end of a long-term debt cycle. Borrow, spend and grow is good for the economy. Credit is money. It is a multiplier that enables you to spend more than you have.

Howard Marks’ “Memos” are a must-read. Years ago, I was invested in Marks’ hedge fund. We exited our fund of funds business in 2007, though it would have served me well to have stayed in his fund. Like most great investment managers, he keeps risk front of mind.

In 1965, Gordon Moore, co-founder of Intel, predicted that the number of transistors on integrated circuits would double every two years. This is the basis of “Moore’s law,” and it’s why we currently have pocket-sized devices that are more powerful than 1980s supercomputers that took up entire rooms.

At a conference in Chicago this week, following up on last week’s letter, Keep Dancing but with a Sharp Eye on the Tea Leaves, an advisor client asked me what my favorite “tea leaf” might be. When one of the greatest investors of our time, Ray Dalio, tells us to keep an eye on the exit door we should take note. But how? And when?

Ray Dalio, chairman of Bridgewater Associates, wrote last week that the global economy is heading toward a new stage where markets won’t get the same level of support from the global monetary policy makers. “The directions of policy are reversing,” he noted.

To a large extent, the U.S. financial crisis was actually made by the Fed… It was ultra-low rates that fueled the search for higher yield that enabled creatively engineered mortgage products (CDOs, CDOs of CDOs, adjustable rate and no-doc mortgages and AAA-rated garbage).

I listened to Bob Farrell several times a week. Bob was the chief stock market analyst at Merrill Lynch. Do you remember those old “squawk boxes?” On my desk sat a small speaker box. It was the firm’s way of communicating to the thousands of brokers.

This week, I’d like to draw to a conclusion my series of notes from Mauldin’s 2017 Strategic Investment Conference. The topics ranged from geopolitical to global macro to specific investment ideas. One of my all-time favorite economists is David Rosenberg. Today I offer my high-level bullet point notes from his presentation.

As I listened to a number of the presentations at last month’s Strategic Investment Conference, silver and gold kept coming up. As did the industrial metal, copper. Make new friends but keep the old… today’s On My Radar continues the sharing of my high level conference notes with you. I walked away with some actionable ideas. Gold and silver were high on the list. The new friend is copper.

Today, you’ll find my high level notes from Mark Yusko’s presentation at the Mauldin Economics 2017 Strategic Investment Conference.

The initial conditions or the starting point conditions, mean to me that a small degree of monetary restraint has a very quick and strong impact on economic activity.

Over the next two to three weeks, I’m going to share with you my high level notes of the 2017 Strategic Investment Conference and some investment ideas (e.g., India looks great). There was bullish discussion on China and emerging markets, but the developed markets are a different story. The Fed and central bankers must remain on our radars.

This is one of the more important pieces I’m sharing with you. It’s a candid look at where we are in the economic cycle and what that likely means for the global markets.

When Ronald Reagan entered office in 1981, forward return expectations were a high 18.91% (see chart below: green line, left-hand side). Equally important was that risk of loss was a low -4.29% (red line, left-hand side). The prior bear market reached its end, yet few knew it. Scream as one might, clients weren’t buying.

I presented at a recent advisor conference alongside a famous economist. He told a story about an investment manager who told him, “You know… it is easy to pick out the investment amateur in any room.” He said, “He’s the person who says, ‘it’s different this time’.”

I enjoy reading 720 Global’s research blog. Quick, crisp and to the point. The message in their most recent piece is about human behavioral tendencies and ego. Ultimately, it’s about how to weave behavior and ego into our investment thinking.

“As I was waiting to be introduced, I got the latest headline from the North Korean government saying ‘a super preemptive strike will reduce the United States to ashes.’ So we have that to look forward to.” Ian Bremmer said as he began his presentation yesterday afternoon at the iShares Multi-Asset Summit in New York City."

Many years ago I created an economic investment dashboard of sorts to help me do my best to keep my head screwed on straight. If you subscribe to a handful of research services, you know what I mean. For every 10 bulls, there are 10 bears.

So should we sing or weep? Warren Buffett has a brilliant way of making the complicated simple. Let’s think about valuations like we think about the price of hamburgers and see if we are going to get more or less for our money. Today, I share with you my favorite valuation charts and story them in a way I hope your clients might better understand.

I’m going to try to tie two related themes together today. The first, and I have to admit I was surprised when I saw the research, is the incredible shrinking universe of stocks. Think corporate share buybacks, mergers and acquisitions and fewer companies going public. The second is the popularity of index investment products...

We touched down late last night in Salt Lake City. Susan, the boys, Brianna and me along with a dozen bags. It’s a long-standing family tradition and let’s just say everyone is really excited. A snowstorm just ended and my Snowbird app says 11” of fresh new snow.

One of the realities we will face is recession. The good news is that we are in the eighth year of a growth phase (the last recession was in 2009) and as you’ll see in my favorite indicator charts below, there are no current signs of recession.

The Fed finds itself in a tricky place. Next week will likely be rate hike number three. “Three steps and a stumble?” We’ll see. My dad used to always say, “Stuck between a rock and a hard place.” I’ll try my best to explain what I see.

At the beginning of each month I like to take a look at the most recent published equity market valuations. So let’s do that today. As you review the charts, keep in the back of your mind that valuation metrics are pretty much useless in identifying market peaks but they are outstanding at helping us zero in on what the forward 10-year returns are likely to be.

Citing an improving economy and the possibility of more spending and lower taxes from the Trump administration, Fed officials are signaling rising rates immediately ahead.

We sipped the QE juice and loved the taste. Now we’re full… the game has changed. The Fed had assets worth $858 billion on its books in the week ended August 1, 2007 just before the start of the financial crisis, and the same stood at $2.24 trillion at the end of 2009.

Andrew Ross Sorkin of CNBC and The New York Times wrote an article this week entitled, “A Quiet Giant of Investing Weighs In on Trump.” It’s about the recent investor letter penned by one of the all-time great investors, Seth Klarman. Many hedge fund managers write privately to their clients yet these letters often find a way on to the internet.

Last week I shared a chart with you that’s done a good job at signaling inflation. We tend to react slowly to news and, over time, we wake up. Then we herd in and out. In the “waking up” category, we better keep rising inflation on our radar.

One of the charts I like to keep an eye on looks at inflation and its impact on stock prices. In rising inflationary periods, stocks tend to struggle. When inflation is falling, stocks tend to perform well.

Donald J. Trump was sworn in as the 45^th President of the United States. President Trump steps to center stage. Bring us jobs, bring us tax reform and bring us a grand fiscal infrastructure spend. That would be positive.

I hate making predictions. I got the tech wreak and sub-prime right, but was far too early on those predictions.

Today, let’s take a look at the most current equity market valuations for they can tell us a great deal about future 7-year and 10-year annualized returns. We’ll also look at the bond market. Total U.S. credit market debt-to-GDP is nearly 355%. Global debt-to-GDP is 325%.

Included in this week’s On My Radar: -Pension Fund Red Ink – Check Out Your State (Chart) -Foreigners are Dumping Treasury Bonds at Record Rate -The Year in Review -Trade Signals – Strong Dollar, Weak Gold, Equity Trend Up, Bond Trend Down, Sentiment Remains Far Too Optimistic

I’ve fielded a large number of investor questions recently around tax cuts and earnings. The idea is that tax cuts, for both corporations and individuals, will significantly improve corporate earnings and thus propel the market higher.

“If you’re not getting better, you’re getting worse.” – Walter Bahr

While on the surface the Italian Referendum appears to be only about the structure of government power and Prime Minister Matteo Renzi’s desire to pass economic reforms, beneath the surface is a serious financial issue that has the potential to impact not just Italy, but Europe and beyond. This may sound small and meaningless to you and me but it is not.

What are the most important investment implications that you and I and your clients might consider post last week’s election?

The last two OMR’s have talked about the long-term debt. I believe it is the significant headwind we face. As CMG’s Brian Schreiner said to me this week, “The math doesn’t allow for a soft landing.” Read on and please let me know what you think.

I’ve written a great deal about debt. In last week’s piece, I showed the enormity of the problem. Growth is slow and I believe will remain in the 1.5% range. Not good enough.

Arnold Palmer! Well done our wonderful friend, well done. And welcome home!

Today, let’s take a look at the most recent market valuations. Hint and not a surprise: both stocks and bonds remain expensively priced. Value? Not today. Especially in the bond market.