Cumberland Advisors Week in Review (Dec 03, 2018 – Dec 07, 2018)

The Cumberland Advisors Week in Review is a recap of news, commentary,
and opinion from our team. These are not revised assessments, and
circumstances may have changed in the market from the time of original
publication. We also include older commentaries that our editors have
determined may be of interest to our audience. Your feedback is always welcome.

MATT MCALEER’S WEEKLY RECAP

Matt McAleer gives us the Week In Review report for the week ending December 07, 2018. What was good? What was poor? How about bonds? Direct from the equities desk is Matt’s view of the market. Thanks for joining us. WATCH HERE.

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MARKET COMMENTARY

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FEATURED VIDEO

Cumberland Advisors – Trump Navarro Trade War Consequences.

David Kotok of Cumberland Advisors comments on the Trump-Navarro Trade War
David Kotok of Cumberland Advisors comments on the Trump-Navarro Trade War with China and its consequences for markets.

The video is available here.


IN THE NEWS


IN CASE YOU MISSED IT

  • Winners and Losers from Global Trade David L. Blond, Ph.D. 3/17/2018

    In a grand effort to change the subject of the political discussion from Russia to something else, President Trump fired the opening shots in a new trade war. Not content to destroy the solar industry by adding costs without adding supply to solar panels, or making South Korean washing machines more expensive without making American consumers more willing to buy US made (with foreign parts) machines from the one remaining American producer, President Trump fired off the big guns to try to save what remains of the US steel and aluminum industries with new tariffs. The response was, of course, expected.Over the past twenty years or more I’ve tried to slow the steady erosion of the US industrial base against the tide of history… Continued…
  • It’s Hot and Getting Hotter – The Case for Adaptive Strategies for a Warming Planet Bob Bunting 08/29/2018

    Bob Bunting, a friend, meteorologist, and accomplished professor, has offered his insight on climate change via this guest commentary, It’s Hot and Getting Hotter – The Case for Adaptive Strategies for a Warming Planet. We appreciate his perspective and invite you to join the conversation. Continued…


UPCOMING EVENTS

  • Adapting to a Changing Climate From hurricanes to red tide and sea level rise, learn how a changing climate affects the Sarasota-Manatee region and the state of Florida. Expert speakers will discuss the challenges and impact on Florida and other coastal communities while uncovering the adaptive strategies that bring unique social and economic opportunities. The featured speaker is Bob Bunting, CEO Waterstone Strategies/Scientist/Entrepreneur – January 25, 2019 – Selby Auditorium, USFSM , 8:30 am – 3 pm. Lunch is included. Cumberland Advisors is a sponsor and Patricia Healy, CFA, from our firm will discuss “Climate, Municipal Bonds and Infrastructure” with the audience. Details Here.
  • U.S. Manufacturing in a Global Context Save the Date! GIC is returning to Sarasota, FL on Friday, February 1, 2019 to partner with the Financial Planning Associates of the Suncoast and Cumberland Advisors. Join us at the Sarasota Yacht Club as we welcome Bill Strauss, Senior Economist and Economic Adviser of the Federal Reserve Bank of Chicago, for a presentation on U.S. Manufacturing in a Global Context. Strauss is a senior economist and economic adviser in the economic research department at the Federal Reserve Bank of Chicago, which he joined in 1982. His chief responsibilities include analyzing the current performance of both the Midwest economy and the manufacturing sector for use in monetary policy. Details Here.


ADDITIONAL RESOURCES

Lessons from Thucydides

David R. Kotok has written the monograph pamphlet, “Lessons from
Thucydides” detailing information asymmetries and their implications for
investors and world affairs. The concept of a Thucydides Trap and its
rise and avoidability (or lack thereof) is often debated and David makes
a case for dealing with them weaving current and historical events into
a comprehensive narrative.

This free monograph also has lessons for President Donald Trump’s trade
policy. Can the United States avoid a Thucydides Trap with China &
Xi Jinping? Will you benefit from the Lessons of Thucydides or fall
victim to a Thucydides Trap? If information is key, you now have a
handbook at your fingertips. Download a copy of this monograph in either
PDF (free) or Kindle ($.99) format.https://www.cumber.com/thucydides/


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Thank you for engaging with us, your comments always welcome.




Today’s Employment Report

Peter Boockvar summarized a view of this Pearl Harbor Day employment report. We agree with him.

Here’s Peter: “Bottom line, the moderation in the pace of job gains coincides with the recent uptick we’ve seen in jobless claims. It’s hard not to wonder how much of this is due to a business pause on the labor front with all the cloudiness on trade and tariffs. Construction seeing only a job gain of 5k could also be reflecting the slowdown going on in real estate, both residential and commercial. Manufacturing job gains did hang in as companies front loaded inventory builds.” (Peter Boockvar, email to subscribers, Friday, December 07, 2018 8:53 AM)

Market Commentary - Cumberland Advisors - Employment Report

In our interview with the Wall Street Journal this morning we enumerated and discussed the anecdotes we see from our client base in over 40 states. There is a slowing underway because of Trump-Navarro Trade War protectionism. It is getting worse, as one would expect. We see it in New England in the lobster industry. We see it in the Western US in construction. We see it in employment composition and businesses’ deployment of assets as they build inventories in anticipation of tariffs. And we see it in delays of capital expenditures as entrepreneurs are bewildered by Trump administration inconsistencies.

Simply put: You cannot make business decisions and investment decisions based on Twitter rampages. That doesn’t work.

The Fed’s Beige Book confirms these anecdotes in reports from the twelve Federal Reserve regions. DataTrek has a compilation out this morning. We have copied and pasted it below. The key to today’s employment report is that the data from the US national report is confirming what the survey data is saying in the Fed’s reports.

Here’s Datatrek:

That’s why we look at the Beige Book when it is released eight times a year, as it offers more color on what’s happening beneath the economic surface than the national data shows. Another word we’ve been closely monitoring in these reports: ‘tariff’. It went from no mentions in the January and March reports to the following times in future editions: April (36), May (22), July (31), September (41), October (51), and December (39).

Clearly tariffs continue to worry businesses across the US, as eleven out of twelve districts mentioned them in the latest report. Also of concern: ‘Most Districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints.’ Not dissimilar to this quarter’s market worries… Here’s some key examples of what they’re saying about each topic from the period of mid-October through late November:

Tariffs

• Boston: ‘An industrial distributor said they expected tariffs to contribute 50 to 100 basis points to price increases for their products… Looking ahead to 2019, retailers expressed significant uncertainty about the impact that tariff increases will have on prices–beyond some point, they will pass the increases on to consumers.’
• Philadelphia: ‘One firm reported that it has passed along its costs from 10 percent steel tariffs but that it expects customers to push back if the tariffs increase to 25 percent.’
• Cleveland: ‘Contacts noted that tariffs were lifting prices further down the supply chain. Selling prices rose with less intensity than they did for input costs.’
• Richmond: ‘Wholesale and retail services saw higher prices for goods affected by tariffs… Tariffs were a significant concern noted by manufacturers, as they were believed to raise costs of raw materials, thereby raising prices and lowering demand… Several retailers reported narrowing profit margins as cost of goods increased as a result of tariffs.’
• St. Louis: ‘Contacts expressed concern over the ongoing tariffs leveled at U.S. agricultural products. There are reports of storage shortages as soybeans that are normally exported to China are being stored in large quantities rather than exported.’
• Dallas: ‘Manufacturing sector slowed during the reporting period, and outlooks were less optimistic than they have been all year. Output growth softened notably in November, with the tariffs, labor constraints, and trade policy uncertainty cited as damping factors.’

‘The upshot: several districts continue to express concern and uncertainty about tariffs and potential changes in trade policy. Tariffs have already increased input costs, which many indicate they will have to pass on to consumers if they haven’t already.'” (Datatrek Morning Briefing, Dec. 6, 2018, “Beige Book: Ghost(ing) of Recession Future”)

Markets are already reacting to the outlook for slowing growth. Future Fed hiking is being repriced to fewer and fewer rate rises. There is good reason, as inflation remains subdued while the economy is slowing to a 2% or lower growth rate.

For bonds this is bullish; and for tax-free municipal bonds, which have been yielding higher than taxable Treasury bonds, this is doubly bullish.

For stocks, this removes or lessens the risk that the Fed will go too far with its hiking strategy. It remains to be seen if the stock market will see a glimmer of positive news in this weaker-than-expected jobs report. News of the arrest of a Chinese firm’s executive casts a pall over any trade negotiations.

For POTUS, this is another warning that the Trump-Navarro Trade War policy is accelerating damage to the economy. One at a time, businesses and investors are becoming disillusioned. We are in the camp that the tariffs are damaging and are spreading like a financial cancer. The Trump-Navarro policy is metastasizing.

We again reiterate that we believe the Trump policy is unsustainable. And we believe that the American business community will overcome it. We continue to use the instability in the equity markets to our advantage by selectively adding to our positions. We believe the time to buy stocks is when no one wants them and when the tape is red. If the Trump-Navarro policy leads to a full-blown cold war with China, we will be proven wrong. But if the mounting evidence reaches into policy enough to alter it, we will be right and markets may soar to new all-time highs within the next two years. Time will soon tell.




Trump Trade War Tariffs & Markets

“We’ll not mince words here: The president’s characterization of himself as “Tariff Man” is juvenile and unpresidential. We cannot imagine Mr. Eisenhower, Mr. Kennedy, Mr. Johnson, Mr. Nixon, Mr. Ford, Mr. Carter, Mr. Reagan, Mr. Bush, Mr. Clinton, Mr. Bush or Mr. Obama ever… EVER… making a juvenile statement such as this to any other nation, much less to a nation as consequential as is China. But Mr. Trump has threatened China, and his base has enthusiastically endorsed his comments. We can only shake our heads in wonder and dismay.” Source: Dennis Gartman, his eponymous daily letter, December 6, 2018.

Trump Trade War Tariffs & Markets

We agree. Markets agree. The red on the tape agrees. The flattening yield curve agrees. The deterioration of business sentiment agrees.

Culprits in order of responsibility are POTUS Trump, US Trade Representative (aka Trade War negotiator) Lighthizer, and Trade War advisor Navarro. The new Senate is planning on a debate to limit presidential trade war authority and to relocate US security provisions to the defense department and not commerce. Remember that this entire trade war narrative has been based on an executive branch’s taking a narrow, half-century-old law and interpreting it loosely to permit protectionism.

The Congress can change that. Will they? We will see.

Meanwhile the Trump administration has undone more than half of the benefits derived from tax cut, deregulation, and repatriation. Navarro poorly advised POTUS, who showed poor judgment and now likes his tariff money, since he has misled Americans by creating a de facto national sales tax imposed on the American consumer.

That is correct, dear reader. You and I pay the higher costs tariffs impose. Trump blames others and says we are imposing tariffs on “them.” Nope. The payment comes from my pocket and yours.

Business doesn’t know how to plan. So it waits. Capital investment waits. And growth slows.

We asked Mike Englund of Action Economics to update his slide used last summer on the panel we did together at a Colorado conference on Trade War effects.

We are reproducing his update below. And we thank Mike for a quick reply and superb effort. We endorse and recommend Action Economics as a basic research service. Mike writes,

“Thanks for the request. I revised the slide I believe you are referencing to include an “All China” tariff by 2020, whereby we have the 90-day cease-fire now; then a 25% tariff as previously threatened for January; then tariffs of 10% on the remainder of Chinese goods at some fall deadline, perhaps in August or September; and a hike to 25% at the end of December 2019. This scenario creates multiple ‘ledges’ for a compromise to be made.”

Dear readers, the classic aphorism holds true: In a trade war the guns are pointed inward. No one wins.

To end this misguided and failing Trump-Navarro tariff policy requires an inflection in policy. Because of trade-war-driven economic deterioration and business slowing, we expect a change to come. When it does, growth will pick up, and stock markets will recover. We cannot replace the business and wealth losses already inflicted on Americans by the Trump-Navarro Trade War. But we can stop the bleeding, and it may take the new US Senate to do it.

Stocks are cheap, and American business wants to grow. Our ETF selections continue to focus on domestic US sectors we like. Healthcare is an example.




January 25th and California Fires

The January 25th GIC-USFSM conference on adaptive climate change, Adapting to a Changing Climate: Challenges & Opportunities, to be held at the University of South Florida Sarasota-Manatee, includes discussion of fires as well as hurricanes. Here is a recent Bloomberg story for reference: “What Wildfires and Hurricanes Mean for the Global Economy” (https://www.bloomberg.com/news/articles/2018-11-22/what-wildfires-and-hurricanes-mean-for-the-global-economy).

2018 has been a horrible and murderous year for fires. We all know that. The issue for climate change deniers and for climate change believers is whether we can expect normalcy or whether something is different now, requiring adaptive solutions. January 25 will focus on that question.

Cumberland Advisors is proud to sponsor this conversation, which presents skilled professionals in a transparent and independent forum. Attendance costs only $50 to cover lunch (registration here).

Now we offer a guest commentary about the California fires. We thank our good friend and GIC board colleague Philippa Dunne for sharing her essay with our readers. Philippa is coeditor of three  macroeconomic newsletters – The Liscio Report, which has a trading focus, Sightlines Bulletin, which offers “concise data-driven monthly analyses of the direction of the American economy,” for professionals and academics, and TLR Wire, frequent, short notes and graphs on important aspects of fresh data missed by the mainstream intended for all readers You can learn more about both and subscribe at http://www.tlranalytics.com.

California Fires, by Philippa Dunne

Two differences jump out when we attend conferences with a higher percentage of speakers who were not born in the US, but may teach here, and we share these now as observations, not criticism. There is considerably more concern voiced about the effects of market concentration and pricing power, which we have outlined; and there is a general sense that US citizens, perhaps especially those in the financial markets, are not accurately anticipating the market impacts when, say, lawsuits and insurance claims caused by extreme weather start rolling in at an ever faster pace.

I grew up in Malibu, where fires were a central part of my childhood.

Every fire has its own unforgettable personality. One marches as a belligerent wall, missing little in its path to the shore; one changes its mind at the last minute, trapping the fire crews and their equipment on the wrong side of the column; and some, like the recent Woolsey fire, flame seemingly in all directions, pouncing on areas the size of football fields in a second.

And they all have different ways of introducing themselves. Sometimes a bunch of tumbleweeds thud into the house: the Santa Ana wind. Sometimes sirens race up the highway; by the time I was five, I could tell which canyon they turned into; and sometimes I would first see reflected flames flickering in my window. Then it’s grab all the animals and your toothbrush, unlock all the doors and gates for the firemen, kiss the ground by your bedroom door with hope, and head for the Georgian Hotel in town. From our rooms there we would stay up all night, looking out across the bay as the unspeakably beautiful flames winged up and down the mountains, seemingly in silence although we knew they were panting.

Firefighting is a male-dominated field. The first female firefighter in this country was Molly Williams, Volunteer #11, a slave owned by a New York City merchant. There have been all-female forest crews since the 1920s, but in the US only 2% of firefighters are women. Los Angeles Mayor Eric Garcetti promised that by 2020, 5% of the LAFD will be women; currently that’s 3.5%. I’m not being sexist when I refer to my wonderful childhood heroes as men.

An owl lands on the beach; a coyote limps on singed foot pads, showing no interest in a fleeing rabbit. A firefighter staggers in the wind.

The fires have always been unpredictable and terrifying, but they have moved into a new dimension. The Paradise fire has set records, but the recent Woolsey fire that flew to the beach in west Malibu, bad as it was, isn’t up to today’s standards. In 1970, the Santa Ana, blowing at 80 miles an hour and gusting to twice that, drove a 30-mile wall of fire from Newhall to Malibu. First we heard it mentioned on the news, and then it was barreling over the mountain so quickly that we barely had time to load up the animals. It did take out the Spahn Ranch, where Charlie Manson and his crew lived (no comment), but also the iconic Serra Retreat, a real loss. That fire was a record-setter then, but it isn’t even in the top twenty these days.

I recently visited friends in Santa Barbara and finally saw firsthand the incomprehensible destruction in the path of the fire and floods of last year. One friend, a real estate agent in Montecito, one of the most idyllic places on earth, said that he is having a tough time determining if business is slow because of interest rates or because buyers are afraid to invest in multi-million-dollar properties threatened by fires and rushing mud. We drove through the slide area: Geologists are still calculating how much the mud (A Look Inside the Montecito Disaster Probe), the consistency of honey and traveling at up to 27 miles an hour, was needed to launch “giant boulders” down the washes.

Thank you, always, to the fire crews, both the pros and the inmate volunteers making $2 a day (and $1 an hour when they are fighting active fires) – may many more go on to join Cal Fire; to the California Highway Patrol – you haven’t lived until a CHP yells at you to “gun it” in order to get over a smoldering divider; and to the migrant farmers who kept working in the fields through the smoke.

My job during the fires was always to drag panicked horses out of their stalls and onto the beach. They really do run back into burning barns. To give you an idea what it’s like, during the Newhall-Malibu fire I was pulling a mare across the sand when I noticed I was stumbling inexplicably, or so I thought. I looked down at my foot, now in slow motion, which was sitting on a board. I picked up my foot and the board came with it, held by a large nail that I couldn’t feel. A stranger ran over, said “It’s okay to scream,” pulled the board off, and raced me across the sand to the vet’s office. I got a tetanus shot and no other treatment. There was no time for that. And mine was just an ordinary fire experience.

No horses were lost in that canyon, but we feel a bit like those horses right now. We’re not a political newsletter, and this is one of the most divisive topics in our country right now. Voicing these opinions could lose subscribers, but we are willing to take that risk. We all have different opinions and want to hear yours.

The optimistic approach is the one that takes steps to slow the climate changes that produce increasingly heavy weather and the historic droughts that make devastating fires more likely. Stephen Pekar, who runs the paleoclimate research lab at the City University of New York, among his many other activities, notes that climate changes are now taking place between 100 and 1000 times faster than they have in the past. To get to the point of taking steps to curb climate change, we have to change the conversation. The risk is asymmetrical – didn’t that Schopenhauer guy have something to say about that? While it’s true that there have always been dramatic shifts in climate, the drivers of those shifts can be measured, and they do not fully account for what we are seeing. We all need to know what the cores drawn from the Greenland ice sheet are telling us. That key research is beautifully chronicled in Richard Alley’s Two-Mile Time Machine (https://www.amazon.com/Two-Mile-Time-Machine-Abrupt-Climate/dp/0691102961). Otherwise we have only opinions.

There are tremendous opportunities in the renewable energy sector, jobs that would help balance the increasingly unequal opportunities available to our working classes. For renewable sources to really take off, we’d have to drop subsidies for the fossil-fuel producers and let the markets work. When the mechanization of our farms sent farm work tumbling from something like 30% of the workforce to the current 1–3%, depending on how you jigger the numbers, the transition was largely enabled by the war effort. Workers were moved from the farms into the factories, and much of what they made was battle-related. Had they been left in the rural areas to fend for themselves, as so many of our machinists have been, what would have happened? Of course, we’d advocate for a green-energy rebuild and retrofitting, not more weaponry, and the tools are ready at hand.

Frank Nutter, head of the Reinsurance Association of America, told writer Eugene Linden a quarter of a century ago that “global warming could bankrupt the [reinsurance] industry.” Linden also points out that while the Insurance Information Institute was singling out Florida as having the greatest exposure to the combined effects of a changing climate, Governor Rick Scott and Senator Marco Rubio went on record to dismiss the threat.

Cargill’s Gregory Page agreed to be on the board of bipartisan Risky Business, which aims to put a price on all of this. You can tell he doesn’t like being there, and good for him for stepping up. He did say he was willing to do so only because the outfit aims to document risks, not look for solutions. Whatever, but he did add that in agriculture the “threat of long-term weather-pattern changes cannot be ignored.”

The IMF produced a 2015 report (https://www.imf.org/en/News/Articles/2015/09/28/04/53/sonew070215a) showing that around the world fossil fuel subsidies amount to $5.3 trillion, or 6.5% of world GDP. Climate-minded economists reckon it would take 1% of world GDP to devise and implement remediation. But that $5.3T amounted to more than total health spending of all the world’s governments at the time. Apparently, the IMF rechecked their work when they saw their results, and we rechecked ours. (Read that again if you need to.)

Around the world we’re using big tax dollars to support a backward-looking sector, making it harder to implement programs tailor-made to get us beyond stagnant wage growth of our middle classes. Although fossil fuel operations lift wages in a slim tranche of well-paid workers, they are not engines of job creation. Green projects, whether they be high-tech explorations or muscle-power retrofits, create jobs that pay well, and retrofits are labor-intensive. They also offset municipal costs for heating and cooling, and cutting back on the time we spend stuck in traffic jams would raise productivity. There’s a lot more data; but as long as people see climate change as an ideological battle, data do not help much. We’ll be happy to send links; just email Philippa: philippa@panix.com

Cue in the creative destruction of a true market economy.


Here is the link to the latest US government report on climate change. We recommend perusal with and open mind and a willingness to alter views: Fourth National Climate Assessment, Volume II: Impacts, Risks, and Adaptation in the United States, https://nca2018.globalchange.gov.

For more information on how to join us in this important conversation at the January 25th GIC-USFSM conference, please visit www.usfsm.edu/climate.

GIC & USFSM - Adapting to a Changing Climate - Challenges & Opportunities
 

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Trump Navarro Trade War Consequences: VIDEO

David Kotok of Cumberland Advisors comments on the Trump-Navarro Trade War with China and its consequences for markets.

 

 




The November Bond Market Bounce

Here’s our first take after the midterm elections. The last three weeks of November have seen a bounce in the bond market, with intermediate and longer bond yields falling after spending most of 2018 rising.

Market Commentary - Cumberland Advisors - The November Bond Market Bounc

 

If we look at the US Treasury market (chart 1), we can see the rise in Treasury yields – across the board – from the end of 2017 to early November. A lot of this rise, in our opinion, was to give yields some competition with equity markets, which were certainly frothy early this year, in January, and then in late summer into September. In addition, better growth numbers for the economy, associated with last years’ tax cut, also helped push yields higher. However, core CPI is at 2.1% – approximately where it was at the time of the election in 2016 – though in early November the 10-year US Treasury yield was about 100 basis points higher, at 3.25%, than it was two years earlier. Thus, REAL yields had risen approximately 1% during this time period.

The November Bond Market Bounce Chart 01
Chart 01

 

Since early November we have seen 10-year US Treasury yields fall from 3.25% to 3% and 30-year US Treasury yields fall from 3.45% to 3.30%. Shorter yields have also declined. What’s going on? We think a number of factors are changing investors’ expectations about rates.
—(1) A slightly softer tone by the Federal Reserve is shifting expectations. While we expect to see the Fed raise the fed funds target in December to 2.25–2.5% percent, the markets certainly seem less married to the idea that we will see three or four rate increases next year.
—(2) Volatility in the equity markets has, we believe, led to some switching into bonds at the margin. Certainly, interest rates that are 80 basis points higher than at the start of the year and even HIGHER on a REAL basis have started to attract interest.
—(3) Previously hot real estate markets in the northeast, California, and other “hot” areas have now cooled. Homes that a year ago were often on the market for 4–5 weeks at most are now on for 4–5 months, and that time is lengthening. Bidding wars are now a thing of the past; and while the housing market may not be fully a buyers’ market, it has clearly transitioned from a sellers’ market. We think the provisions of last year’s tax bill, which dictated that state income taxes and local property taxes will no longer be deductible on federal taxes, are starting to have an effect now that we are less than six months from tax day. Clearly, areas that have high relative property taxes are grappling with what is now a higher after-tax cost of owning a home. Higher mortgage rates this year have also contributed to this cooling,
—(4) The market is reckoning with the fact that the increasing US government deficit will start to have ramifications that were not present over the past half dozen years.


In the charts above we see the growth in outstanding US government debt and Congressional Budget Office projections for future growth. We can see the growth of outstanding federal debt from $10.7 trillion in 2008 to an estimated $21.4 trillion at the end of this year. However, the net interest expense on that government debt barely budged between 2008 (at $252 billion) and 2017 (at $262 billion). But note the large jump this year and going forward. Interest expense on the government debt barely rose in the last decade because of ultra-low interest rates, particularly on shorter-term debt. The jump in interest expense going forward is a function of the higher interest rates in force today.

The November Bond Market Bounce Chart 04

For example, the above graph shows 5-year US Treasury yields going back more than a decade. Bonds that were issued in 2007 at 5% could be replaced when they matured in 2012 at a little more than 0.5%. We are now going the other way. Five-year notes that were issued in the middle of 2013 at around 1% were being replaced this year at almost 3%. This extra interest expense could act as a wet blanket on an economy that is still growing because of lower unemployment and tax cuts.

We think all of this activity has caused investors to ratchet down expectations. We have extended durations within our barbell strategy during the past two months and believe there are forces that should keep intermediate and longer-term interest rates in a trading range, with a bias to going lower. We believe that, with long Treasuries at 3.30%, longer tax-free municipal bond yields in the 4% range still represent excellent value – particularly in high-tax states that will be grappling with the SALT provisions of the tax bill.

We wish all our readers a great holiday season.

John R. Mousseau, CFA
President and Chief Executive Officer, Director of Fixed Income
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




The FOMC: What Next?

In another week the FOMC will have its final meeting of 2018 and its last with the current mix of policy makers. Already, the discussion has turned to what the Committee will do at that and subsequent meetings: Will it proceed with further 25bp increases in the target range for the federal funds rate, or will it pause?

Federal Reserve - FOMC

Markets appear to have priced in another rate increase in December, at least as signaled by what has happened to the short end of the Treasury curve, shown in the chart below.


 

Chairman Powell afforded this view credibility in a speech he gave on November 28 in New York.[1] Although the purpose of the speech was to highlight the release of the Fed’s first-ever financial stability report, he did touch on monetary policy. After noting the delicate balance between moving policy rates too fast or too slow to achieve the Fed’s dual mandate and the need to consider information contained in incoming data, he stated that, as far as current policy is concerned, “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy….” What Powell is clearly saying is that he would be comfortable with at least one more rate increase, and this sets the stage for the FOMC’s next move in December.

There are two important reasons why the FOMC will move at its next meeting. First, it has provided justification of where rates should be to be “neutral”- that is, neither too tight nor too loose with regards to slowing down or speeding up growth. Second, that justification blunts any perception that the FOMC may be bowing to political pressure from the White House when it comes to setting rates. By saying it is “almost there” and stating that further moves are data-dependent, the FOMC is setting the stage for a possible pause. And the rationale for such a pause will be contained in the Summary of Economic Projections, if the Committee does indeed decide that it has achieved a neutral policy stance.  Clearly, world growth is slowing and should the slowing continue that may be sufficient to justify a pause by the Committee.

The minutes of the November FOMC meeting, released November 29, reinforce the “almost there” view articulated by Chairman Powell in his speech. The minutes reveal some concern on the part of FOMC participants about the risks to inflation posed by uncertainty concerning the fiscal situation and trade policies. The Committee laid those concerns aside, however, in commenting on the path for policy, and there was agreement that “another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on labor market and inflation was in line with or stronger than their current expectations.” However, some expressed uncertainty over the timing of further increases, while at least two participants expressed the view that the neutral policy stance had been achieved. The bottom line is that the minutes, combined with Chairman Powell’s “almost there” hint in his NY speech, perfectly position the FOMC for another rate increase at its December meeting, while preserving flexibility to pause at future meetings and putting some distance between the FOMC and the White House.

The minutes are interesting for another reason as well, because they indicate the nature of the current state of the discussions about how future policy might be conducted once the Fed has normalized its balance sheet. That decision is shown to hinge critically on whether the FOMC decides to return to the pre-crisis regime of a balance sheet determined primarily by currency demand and a low level of excess reserves or favors instead a large balance sheet with a large volume of excess reserves. The former would imply policy exercised by small changes in the volume of excess reserves achieved through manipulation of the federal funds rate in the overnight market. The latter would imply continuing the reverse repo approach and dealing with a larger number of potential non-bank counterparties, such as money market mutual funds. It is clear from the discussion that no decision on these alternatives has been made, and the decision process is complicated by changes in how financial markets have functioned in the wake of the financial crisis. The clear message in the minutes is that this discussion is “to be continued.”

Robert Eisenbeis, PhD.
Vice Chairman & Chief Monetary Economist
Email | Bio


[1] Chairman Jerome H. Powell, “The Federal Reserve’s Framework for Monitoring Financial Stability,” The Economic Club of New York, New York, November 28, 2018.

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Cumberland Advisors Week in Review (Nov 26, 2018 – Nov 30, 2018)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team. These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

Week In Review

MATT MCALEER’S WEEKLY RECAP

Matt gives us the latest from the Equity Desk In this Week In Review for November 26-30, 2018. Our Director of Equity Strategies for Cumberland Advisors tells you how he’s trading and shares some forward thinking. WATCH HERE.

Cumberland-Advisors-Matt-McAleer-Market-Position-Broadly


 

MARKET COMMENTARY

 

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FEATURED VIDEO


John Mousseau joins Matt McAleer this week for a discussion about his week in bonds.

The video is available here.


IN THE NEWS

 

 

 

 


IN CASE YOU MISSED IT

 

    • Bitcoin price WARNING: HILARIOUS moment investor compares cryptocurrency to CHOCOLATE COIN

      David Kotok 1/04/2018

      BITCOIN is as tangible as a chocolate coin a top investor has warned in a hilarious quip about the cryptocurrency. Appearing on Bloomberg, Mr Kotok offered the hosts a “New Year’s gift” – a chocolate coin shaped like a bitcoin. Handing out the sweet treat, he said: “I brought proof that bitcoin can be tangible, here’s a New Year’s gift for each of you.” The delighted presenters asked if the gift was chocolate. Mr Kotok said that the chocolate version of the cryptocurrency had more value than the real thing. He said: “That is a chocolate covered bitcoin, that is the most tangible value you will see in bitcoin.”Continued…

 

  • Europe’s Migration Crisis

    Bill Witherell 12/15/2015

    A European perspective on the complex societal challenges now confronting Europe as it seeks to address a humanitarian crisis and heightened security risks. A reader shares, “In every institution, including education, we take for granted that men and women will mix and work together. My friends’ children are off dating each other and staying over at each other’s houses. Think about this very specifically and you see that the whole basis of social organization will come under pressure if migration continues, or is allowed to continue, on the scale which seems likely. Think about business life, and you’ll see the same thing. The questions to ask are these: How many will come, or try to come, in the coming years? How will they try to live when they get here? What will the reaction of Europeans be? How will all this affect enterprise, investment, and credit ratings?” Continued…

 

 


 

UPCOMING EVENTS

 

    • Adapting to a Changing Climate

      From hurricanes to red tide and sea level rise, learn how a changing climate affects the Sarasota-Manatee region and the state of Florida. Expert speakers will discuss the challenges and impact on Florida and other coastal communities while uncovering the adaptive strategies that bring unique social and economic opportunities. The featured speaker is Bob Bunting, CEO Waterstone Strategies/Scientist/Entrepreneur – January 25, 2019 – Selby Auditorium, USFSM , 8:30 am – 3 pm. Lunch is included. Cumberland Advisors is a sponsor and Patricia Healy, CFA, from our firm will discuss “Climate, Municipal Bonds and Infrastructure” with the audience. Details Here.

 

  • U.S. Manufacturing in a Global Context

    Save the Date! GIC is returning to Sarasota, FL on Friday, February 1, 2019 to partner with the Financial Planning Associates of the Suncoast and Cumberland Advisors. Join us at the Sarasota Yacht Club as we welcome Bill Strauss, Senior Economist and Economic Adviser of the Federal Reserve Bank of Chicago, for a presentation on U.S. Manufacturing in a Global Context. Strauss is a senior economist and economic adviser in the economic research department at the Federal Reserve Bank of Chicago, which he joined in 1982. His chief responsibilities include analyzing the current performance of both the Midwest economy and the manufacturing sector for use in monetary policy. Details Here.

 


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Eurozone Equity Markets Face Political Headwinds

Eurozone equity markets have had a difficult year thus far, losing some 13.2% as of November 28, as measured by the iShares MSCI Eurozone ETF, EZU. While a slowing economy and a 6% weakening of the euro offer a partial explanation of the US-dollar return from these markets, a number of political uncertainties appear to have been more important causes.

Market Commentary - Cumberland Advisors - Eurozone Equity Markets Face Political Headwinds

These uncertainties include the outcome of the Brexit process, Italy’s budget conflict with the European Union (EU), trade war concerns, and the recent political turmoil in France and on the Zone’s eastern border, with the dangerous escalation of tensions between Russia and Ukraine. As the year end approaches, these headwinds to investor market sentiment have not eased.

With time running very short, there remains great uncertainty about Brexit. The EU governments have agreed to the draft agreement between the EU and the UK that provides the terms of the UK’s withdrawal from the EU and have indicated that they are not open to making any changes in it. Prime Minister May now has the very difficult task of seeking the approval of the UK House of Commons (one of the two houses of Parliament), which will vote on the subject on December 11. May now finds it necessary to argue against her past statements that no deal is better than a bad deal. She has emphasized that this is the best deal the UK can obtain and would be much better than exiting without a deal next March. However, there is great opposition to the deal from both May’s Conservative Party and from opposition-party MPs, including those strongly intent on leaving the EU, on the one hand, and those strongly preferring to remain in the EU, on the other. The deal, as structured, falls in the middle ground, not fully satisfactory to anyone; but a no-deal break would clearly be very damaging to both the UK and the EU. The Bank of England just released their analysis which indicates a no deal Brexit (a “disorderly Brexit”) would lead to a recession worse than the financial crisis. That possibility may lead some to reluctantly vote for the deal or to abstain. Nonetheless, it appears likely the Commons vote will be negative, if the vote is on the current text. It now appears there will be amendments to that text before the vote. What then will follow is highly uncertain.

Rejection by the House of Commons would leave the government with 21 days to put forward a further revised plan, which would go to a second vote in Commons. Any changes in the original draft agreement would require reopening negotiations with the EU. One amendment suggested as a solution adds a sunset provision to the so-called backstop provision in order to remove the possibility that the UK would be locked into the backstop customs union indefinitely. The most-mentioned proposal for a more extensive renegotiation of the deal is the “Norway option,” which would involve the UK’s joining the European Free Trade Association. But that option has a number of drawbacks: the UK would still have to make payments to the EU, would still have to find a solution to the Irish border issue, and would not gain control over migration.

A Commons’ rejection on December 11 could also very well trigger a challenge to Prime Minister May’s leadership, which could lead to a new Tory Prime Minister. There might also be a general election, which could possibly bring in a Labour government. Labour has had unclear views as to which way to move on Brexit but clearly intends to pursue policies strongly opposed by business. The likely second vote in Commons, either on the current deal again or on a revised arrangement, if affirmative, would then see the measure taken up by the European Parliament. A simple majority there would lead to consideration by the European Council, where approval requires the affirmative votes of 20 countries representing at least 65% of the population.

Should the second vote in the UK Parliament be negative or the agreement be rejected by the EU, the UK would likely exit the EU with no deal on March 29, 2019. But that outcome is not the only possibility. The EU could agree to extend the time limit and continue negotiations despite having said they would not do so. The UK could decide to hold a second referendum on Brexit, a step more likely should the Labour Party come into power following a general election. Another possibility would be a new referendum after the UK exits the EU. A positive vote on rejoining the EU would require agreement by the EU, which would be possible if an exit deal had finally been approved but very unlikely for many years in the case of a no-deal BREXIT. In view of all the various possible outcomes, uncertainty is weighing heavily on investor sentiment.

The budget stand-off between the new Italian government and the EU has escalated. The EU has announced that Italy’s proposed budget is in “particularly serious non-compliance” with previous commitments and EU regulations. This pronouncement signals the likely beginning of the EU’s formal enforcement process, which can lead to large financial penalties. There are reports that the Italian government is beginning to yield a bit on its budget, which may provide some room for Brussels to reach an agreement that avoids the most severe outcome.

The Bank of Italy has issued a warning that the rising bond yields caused by the government’s expansive spending plans could threaten the stability of Italy’s banks and insurers as well as add billions to the interest on Italy’s debt. Moody’s has cut Italy’s local and foreign currency ratings to Baa3 from Baa2. Foreign investors are shedding Italian bonds, while Italian retail investors do not appear eager to increase their participation in the government’s debt raising. The high interest rates and developing strains on the banks certainly will not help the Italian economy, the Eurozone’s third largest, to reverse the slowdown that has developed over the course of this year.

Trade uncertainties have had an impact on economies around the globe, hampering global economic growth. For the Eurozone economies, the uncertainties include those related to Brexit, to the US–EU trade conflicts, and to the widespread effects of the US–China trade war that have already emerged. The IHS Market Eurozone PMI for October, which showed that the Eurozone’s economic growth had slowed to its lowest pace in over two years, cited “an export-led slowdown, linked to growing trade tensions and tariffs.” The IHS Markit Flash Eurozone PMI for November then indicated that growth had dropped further to near a four-year low. It cites a further fall in new export orders across manufacturing and services. The drop in exports was the largest seen in the four-year history of this indicator.

The political difficulties of French President Macron do not yet appear to have seriously affected the French economy, which continues to grow at above-trend rates. His business-friendly economic reforms are a plus there. Spain’s economy also is recording firmer gains in activity. In contrast, the growth of the German economy, the Eurozone’s largest, slumped to a five-month low in October, and Italy’s growth turned negative in October for the first time since 2014.

Relative equity market performances year-to-date reflect these differences in economic activity. The iShares MSCI Germany ETF, EWG, is down 17.5%; and the iShares MSCI Italy ETF, EWI, is down 15.9%; while the iShares MSCI France ETF, EWQ, is down only 9.4%; and the iShares MSCI Spain ETF, EWP, is down 11.5%. A sustained recovery in the Eurozone markets would be possible should trade tensions ease. A final agreement between the UK and the EU on the terms of the UK’s withdrawal from the EU would also provide a substantial boost for these markets. In the current highly uncertain situation, caution and close monitoring of developments are warranted.

William Witherell, Ph.D.
Chief Global Economist
Email | Bio


Sources: BBC.com, Financial Times, Bloomberg, New York Times, The Economist


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Red Tide, January 25th Sarasota Conference on Climate Change

The January 25th GIC-USFSM conference, Adapting to a Changing Climate: Challenges & Opportunities, to be held at the University of South Florida Sarasota-Manatee, is open to the public. The sponsors, including Cumberland, helped so as to allow the cost of registration to be held to $50, a registration fee that covers the lunch.

GIC & USFSM - Adapting to a Changing Climate - Challenges & Opportunities
 

Climate-change believers and deniers are welcome. The purpose of the event is to put facts and details in the public domain for discussion.

Red tide and the toxins it carries are among the issues we will take up. Ask any Sarasota restauranteur or hotel manager what has happened to business these last few months, and the economic impact on Florida becomes clear. All political personalities interested in mitigating the effects of red tide on their jurisdictions are welcome to attend or send staff.

Let me get to a specific health issue related to red tide. I will start with a quoted email from a national personality whom I know personally. He contracted an illness believed to be a result of breathing red tide toxin or the related algae bloom toxin.

He wrote:

“I’ve easily found articles with various analyses of probable causality between bodily responses to Brevetoxins and auto-immune system responses generally associated with organizing pneumonia.

“The experts I have want to identify similar episodic correlations in order to study specific trends and narrow the range of potential causality.

“Has your group associated among any Florida pulmonologists that have seen similar cases?

“One of the fundamental issues may be that the primary group at risk of serious chronic illness is visitors that have no prior immunities from low doses of Brevetoxin exposure. They suffer the effects of a red tide bloom of Karenia brevis algae and then leave Florida before any of the major chronic illness symptoms appear.

“They know they are sick but have no contact with medical professionals that understand normal red tide irritations. That now seems to be the primary missing link.

“Research is so much fun (if only I didn’t have to concurrently live the experience).”

My friend also sent this report:

“David,

“Initial biopsy result on the biggest spot in my lung found ‘organizing pneumonia’ and no malignancy – good news.

“The point at which the coughing and respiratory irritation that resulted in this particular ‘pneumonia’ began, however, directly coincides with my exposure to red tide in April. My med records are very clear that there was no cough or other irritation symptoms before that exposure.

“If there would be any interest in this situation among you and your friends, let’s talk.

“I’m going to enjoy Thanksgiving with family and head to FL. If there’s interest, maybe we can gather and discuss a follow-up for the public health of FL, as Judy and I traverse the Tampa area after Thanksgiving.

“My AA pulmonologist and I will do more to follow up in Dec. I’ve got numerous other spots we need to analyze further before declaring ‘victory.’”

Dear reader: My point of this personal story is direct. This could be you or me. Research and discussion are needed. And what we’re dealing with here is a second-order effect of climate change, just like growing hurricane intensity and rising sea levels.

We are going to have a full auditorium on January 25, with thorough presentations and discussions of facts.

Below is a series of extracts and links on the red tide and toxin issues:


“Harmful Algal Bloom (HAB)-Associated Illness… Harmful algal blooms (HABs) are the rapid growth of algae that can cause harm to animals, people, or the local ecology. A HAB can look like foam, scum, or mats on the surface of water and can be different colors. HABs can produce toxins that have caused a variety of illnesses in people and animals. HABs can occur in warm fresh, marine, or brackish waters with abundant nutrients and are becoming more frequent with climate change.”
(Centers for Disease Control and Prevention, https://www.cdc.gov/habs/index.html)


“Exposure to harmful algal bloom toxins found in cyanobacteria (blue green algae) or Karenia brevis red tide can cause severe illness in pets, livestock, and wildlife when contaminated water is ingested or when animals lick their fur after swimming.”
(Florida Dept. of Health, http://www.floridahealth.gov/environmental-health/aquatic-toxins/aquatic-toxins-program-animal-health.html)

“About Red Tide… Algae are vitally important to marine ecosystems, and most species of algae are not harmful. However, under certain environmental conditions, microscopic marine algae called Karenia brevis (K. brevis) grow quickly, creating blooms that can make the ocean appear red or brown. People often call these blooms ‘red tide.’

“K. brevis produces powerful toxins called brevetoxins, which have killed millions of fish and other marine organisms. Red tides have damaged the fishing industry, shoreline quality, and local economies in states such as Texas and Florida. Because K. brevis blooms move based on winds and tides, pinpointing a red tide at any given moment is difficult.

“ASSESSING THE IMPACT ON PUBLIC HEALTH

“In addition to killing fish, brevetoxins can become concentrated in the tissues of shellfish that feed on K. brevis. People who eat these shellfish may suffer from neurotoxic shellfish poisoning, a food poisoning that can cause severe gastrointestinal and neurologic symptoms, such as tingling fingers or toes.

“The human health effects associated with eating brevetoxin-tainted shellfish are well documented. However, scientists know little about how other types of environmental exposures to brevetoxin—such as breathing the air near red tides or swimming in red tides—may affect humans. Anecdotal evidence suggests that people who swim among brevetoxins or inhale brevetoxins dispersed in the air may experience irritation of the eyes, nose, and throat, as well as coughing, wheezing, and shortness of breath. Additional evidence suggests that people with existing respiratory illness, such as asthma, may experience these symptoms more severely.”
(Centers for Disease Control and Prevention, https://www.cdc.gov/hab/redtide/pdfs/about.pdf)


Here are additional red tide resources:

“Harmful Algal Bloom (HAB)-Associated Illness… Publications, Data, & Statistics”
(Centers for Disease Control and Prevention, https://www.cdc.gov/habs/publications.html)

Here is the link to the latest US government report on climate change. We recommend perusal with an open mind and a willingness to alter views: Fourth National Climate Assessment, Volume II: Impacts, Risks, and Adaptation in the United States, https://nca2018.globalchange.gov/.

For more information on how to join us in this important conversation, please visit www.usfsm.edu/climate

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.