Cumberland Advisors Week in Review (Dec 02, 2019 – Dec 06, 2019)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team.

Week In Review

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.

CUMBERLAND ADVISORS’ WEEKLY RECAP

As part of Cumberland Advisors’ continuous effort to maintain strong customer relationships, we offer this week’s short video discussing current market conditions and how we are positioning portfolios.


 

Employment report out today. Nice surprise!

This week, we talk about:

-Bonds, inflation, and the yield curve
-Do we see a buying opportunity?
-Equities – Growth, Value, and some comparisons
-When the market starts to rally, money’s chasing growth
-The Employment Report
-Lingering Trade War effects?

Watch in the video player above or at this link: https://youtu.be/eYiWAn4Bzik

Have a great weekend and thank you for joining us at Cumberland Advisors.

Matt enjoys your feedback. You can reach him at:
-Link to Matt’s Email: Matthew.McAleer@Cumber.com
-Link to Matt’s Twitter: https://twitter.com/MattMcAleer4
-Link to Matt’s LinkedIn: https://www.linkedin.com/in/matthew-c-mcaleer/
-Call Matt: (800) 257-7013

Or email us at info@cumber.com or give us a call at (800) 257-7013




David R. Kotok offers this ongoing series of “Year-End & 2020 Forecast Notes” for your consideration. More to come!

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes

Cumberland Advisors Market Commentary – Year-End & 2020 Forecast Note #4: Inflation

Author: David R. Kotok, Post Date: December 6, 2019

The outlook for inflation and for inflation-sensitive financial instruments is still highly uncertain. Note that this prognosis includes TIPS on the bond side and certain inflation-sensitive stock groups on the equity side. The world’s mature economies have been trying to get inflation up to 2% or higher for many years. They’ve had no success. An [Continued…]

Cumberland Advisors Market Commentary – Year-End & 2020 Forecast Note #3: Potential Volatility Driven by US Politics

Author: David R. Kotok, Post Date: December 5, 2019

US politics will be a closely watched, bubbling pot in 2020, and the media will boil over every news item. That said, it is Super Tuesday (March 3) which becomes the key date for Democrats. Republican challengers to Trump seem to be non-starters as best as we can determine. Perhaps the New Hampshire or Massachusetts [Continued…]

Cumberland Advisors Market Commentary – Year-End & 2020 Forecast Note #2: A Vulnerable Trajectory for Stock Prices

Author: David R. Kotok, Post Date: December 4, 2019

In addition to Trade War uncertainty, US stock markets must grapple with problematic earnings estimates for 2020. Typical year-start estimates are higher than actual outcomes, as a bias toward optimism appears around the year-end holiday time. A good example is 2019, when year-start estimates for the S&P 500 were in the $174–178 range. The actual [Continued…]


The MoneyShow Orlando 2020


John Mousseau at the Money Show Orlando

John R. Mousseau, CFA, will be joining a large gathering of members of Wall Street’s financial community in Orlando this winter season for The MoneyShow Orlando 2020. The three days of the conference will focus on new investment ideas that address the current economic and geopolitical environment and will feature tools, strategies, and advice which may help you better position your portfolio.

John will be a featured speaker, giving a review of the bond market in the past year (2019) and what we should expect from the bond market in a presidential election year.

To join John in February 2020 or learn more, please visit: https://conferences.moneyshow.com/moneyshow-orlando/


Bloomberg Surveillance: Negative Interest Rates with Kotok (Radio Podcast)

Author: David R. Kotok, Post Date: November 27, 2019

Cumberland Advisors’ David R. Kotok talks about negative interest rates, NIRP, and says the European Central Bank’s (ECB) Christine Lagarde has a difficult task right now.

Cumberland's David Kotok on Bloomberg Radio

He also discusses China, the pork shortage, and the impact of viruses on the global food supply.

Running time 25:02, David is introduced at the 10:45 mark – Play Episode: https://www.bloomberg.com/news/audio/2019-11-27/surveillance-negative-interest-rates-with-kotok-podcast

Also see David’s Nov 25, 2019 commentary on NIRP: https://www.cumber.com/cumberland-advisors-market-commentary-nirp-lagarde-trump-dickens-holidays/


Collecting toys for the girls and boys! Sarasota County Sheriff’s Office is hosting its third annual holiday toy drive benefiting the 12th Judicial Circuit of Florida’s Guardian ad Litem program and we’re participating at our Sarasota, FL office. Info here: https://bit.ly/2OO8f2I
Pictured in our photo are Cumberland Advisors’ Patricia Healy & Todd Engelhardt with our first round of toys. Thank you to all supporters!
Closer to our Vineland, NJ office? Cumberland County Technical Education Center’s Interact Club has partnered with the Vineland Salvation Army for its eighth annual Holiday Toy Drive. More info: https://bit.ly/2qkd7TS
Thanks to everyone that participates in community service projects, you make the world a better place!!!

In Case You Missed It…

Reflections on Mumbai and What It Might Mean

Author: Bob Eisenbeis, Post Date: December 4, 2008

Several years ago I had an occasion to go on a mission for the IMF to the Central Bank of India, headquartered in Mumbai. It was the second week of December, so it was past the rainy season and the weather was warm, with temperatures in the high 80s and low 90s. That India is the scene of so many incidents of unrest and violence should not be surprising. The wide disparity of income plus the long history of the caste system and discrimination against various ethnic and religious groups is a hard legacy to shake. Poverty hits you even as you land at the airport in Mumbai. At the end of the runway were many acres of tents made out of black plastic garbage bags, which were homes to many. It hits you again on the drive into the city from the airport. A similar sight awaits you in downtown Mumbai from the Central Bank of India, which overlooked a similar several-acre tent city.

Because it was the dry season, work had begun on road repairs. Instead of dump trucks, however, I saw on the way in from the airport many women dressed in colorful saris, each with a basket of dirt on her head, performing the dump trucks’ tasks. [Continued…]


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.

Sign up for our FREE Cumberland Market Commentaries

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 Market Commentary – Year-End & 2020 Forecast Note #4: Inflation

The outlook for inflation and for inflation-sensitive financial instruments is still highly uncertain. Note that this prognosis includes TIPS on the bond side and certain inflation-sensitive stock groups on the equity side.

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes 4 - Inflation

The world’s mature economies have been trying to get inflation up to 2% or higher for many years. They’ve had no success. An example is cited by my friend Jim Bianco, of Bianco Research. Jim wrote this on November 29th:

“The Fed instituted its inflation target in January 2012, targeting a year-over-year PCE at 2%. The Fed can contort themselves all they want, but they have not been successful in hitting this target. In the eight years since they adopted it, core PCE has been above target exactly four months, with the highest reading in July 2018. Headline PCE has been above it more often thanks to rising energy prices. Looking forward, inflation expectations suggest the Fed will struggle to hit their 2% goal. The two surveys of inflation expectations, New York Fed and University of Michigan, are both plunging to new all-time lows.”

We track many measures of inflation at Cumberland. They are mostly confirming Jim’s view, although there are some high-frequency indications that suggest a little more inflation could be forthcoming in 2020. We think some more inflation could show up in 2020 if we didn’t have the Trump Trade War dynamics (wildly inconsistent tweets included) interfering with economic cycles. Instead we have sluggish capital expenditures as business agents defer decisions because of high and rising Trump uncertainties. We do NOT expect Trump to change his behavior. We do NOT expect the sluggish capex outlook to change.

The forces are building on the monetary side for additional inflation, but it takes a catalyst for the transmission of heavy monetary expansion into the general price level. We do see warning signs of excessive asset inflation, and those appear in many types of assets.

The Federal Reserve Banks of Cleveland and Dallas maintain public inflation series updates, which are available to the general public with email notices of the updates. (See https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx and https://www.dallasfed.org/research/pce/inflation.) Both reserve banks are dedicated to providing the most accurate and timely updates. We subscribe to their releases and read them on receipt. We encourage clients, consultants, and general readers to do the same.

For 2020, the outlook for inflation is something around 1.5% to 2%, but there is some chance a drift above 2% can occur IF we don’t have shocks.

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


Read the full series of “Year-End & 2020 Forecast Notes” by David R. Kotok at this link (updated as they are published):
https://www.cumber.com/cumberland-advisors-market-commentaries-year-end-2020-forecast-notes-by-david-r-kotok/


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.

Sign up for our FREE Cumberland Market Commentaries

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 Market Commentary – Year-End & 2020 Forecast Note #3: Potential Volatility Driven by US Politics

US politics will be a closely watched, bubbling pot in 2020, and the media will boil over every news item.

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes 3 - Potential Volatility Driven by US Politics

That said, it is Super Tuesday (March 3) which becomes the key date for Democrats. Republican challengers to Trump seem to be non-starters as best as we can determine. Perhaps the New Hampshire or Massachusetts primaries (occurring on February 11 and March 3, respectively) will give some delegate count to Weld. Even so, the Republican nomination is solidly in the Trump-Pence re-election camp and is already seriously well-funded.

The Biden candidacy may be wounded by the Burisma payments to Biden’s son. It makes for an incessant and damaging media attack on Joe Biden. We can expect it and the Ukraine/impeachment fight to continue to generate a nauseating amount of media attention. And there has yet to be offered any clear, detailed explanation on why the payments were made and for what value-added proposition. A Reuters article published in October characterizes what Hunter Biden did for Burisma during his five-year tenure on the board in general terms, stating that Biden “provided advice on legal issues, corporate finance and strategy,” whatever that advice might have entailed (https://www.reuters.com/article/us-hunter-biden-ukraine/what-hunter-biden-did-on-the-board-of-ukrainian-energy-company-burisma-idUSKBN1WX1P7).

In American history it is big deal to impeach a president, even when impeachment is a partisan political act. In this case we may witness a trial in the Senate that probably will be unlike anything the country has seen in its history. There is only the written documentation of the trial of Andrew Johnson in 1868, which is viewable page by page at http://memory.loc.gov/cgi-bin/ampage?collId=llcg&fileName=084/llcg084.db&recNum=0. In the case of the second trial, of President Bill Clinton in 1999, there are video recordings of the trial, the presentation of the articles of impeachment, and the vote, which occurred without debate. (See all at https://www.c-span.org/impeachment/?person=clinton.)

The Trump impeachment trial promises to be a much different type of show. We expect it will surpass The Apprentice in ratings and that it will end without a “you’re fired” conviction in the Senate. That said, the trial will distract from any policy advancement,  it will damage the country in the eyes of the world, and it will make all global negotiations more difficult.

So we must wait on the timeline for an impeachment trial, but we know about a date that is certain: March 3, 2020, when Super Tuesday will better define the Democratic race. Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo, has done superb analytical work on the pricing of derivatives around the important March 3 political date. I cannot reveal that analysis here, as it is for institutional customers only, and “distribution or dissemination is strictly prohibited” by Wells Fargo.

Suffice it to say there are noticeable market-based pricing references around the political outcome dates. The only forecast we can make on this subject is that volatility is likely to rise or even spike on any surprise.

Please note that Cumberland employs three quantitative strategies that may be impacted by any of these events. On December 1, 2019, two of those three strategies were 100% in cash or cash equivalents, and the third strategy was in defensive mode. These strategies can change at any time. Information on the three strategies is available upon request. Just send me an email.

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


Read the full series of “Year-End & 2020 Forecast Notes” by David R. Kotok at this link (updated as they are published):
https://www.cumber.com/cumberland-advisors-market-commentaries-year-end-2020-forecast-notes-by-david-r-kotok/


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.

Sign up for our FREE Cumberland Market Commentaries

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 Market Commentary – Year-End & 2020 Forecast Note #2: A Vulnerable Trajectory for Stock Prices

In addition to Trade War uncertainty, US stock markets must grapple with problematic earnings estimates for 2020. Typical year-start estimates are higher than actual outcomes, as a bias toward optimism appears around the year-end holiday time. A good example is 2019, when year-start estimates for the S&P 500 were in the $174–178 range. The actual result for 2019 is more likely to be $162–164.

Market Commentary - Cumberland Advisors - A Vulnerable Trajectory for Stock Prices

The 2020 US stock market outlook depends on economic growth worldwide. And continued growth depends on the outlook for a Trump Trade War ceasefire and on a lack of serious financial shocks (like a breakdown in American CLOs or credit deterioration of many countries’ junk bonds or Chinese banking system risk). In the absence of shocks, the market is pricing an approximate 19 price/earnings multiple on the S&P 500 Index.

Consider the equity risk premium with a 19 or possible 20 multiple. The earnings yield would be about 5%. There would be no margin for any shocks or any errors. Without the shocks, a higher trajectory for stock prices can continue and be sustained. Any shock calls that assumption into question. One can argue that the benefit for stock prices that is attributable to low interest rates has run its course.  In fact, we see lower rates or negative rates a threat to the stock market.

If we are correct in that assumption, the engine for higher stock prices depends on higher earnings and positive earnings surprises. Will we see them?

Our friend Christopher Whalen has penned a superb analysis of the banking sector, titled “Four Charts: US Bank Earnings Are Falling.” Here is the link: https://www.theinstitutionalriskanalyst.com/single-post/2019/11/30/Four-Charts-US-Bank-Earnings-Are-Falling. If Chris is correct, the banking sector must experience zero shocks if it is to sustain a flattening earnings trend.  Note that Cumberland is underweight large banks; we’ve taken the profit in that position.

Other sectors have different levels of exposure. We will talk about them in future year-end and 2020 forecast commentaries.

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


Read the full series of “Year-End & 2020 Forecast Notes” by David R. Kotok at this link (updated as they are published):
https://www.cumber.com/cumberland-advisors-market-commentaries-year-end-2020-forecast-notes-by-david-r-kotok/


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.

Sign up for our FREE Cumberland Market Commentaries

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 Market Commentary – Year-End & 2020 Forecast Note #1: US–China Trade War

In our opinion, investors should not be deceived by any promise of a definitive Trump Trade War settlement. It isn’t in the cards. The best outcome is a truce, and even that will be more like a ceasefire. As of this writing, U.S.-China tariff talks continue, and a phase one trade deal is still expected to be passed. Global equities (excluding China, HK) have rallied on improving growth outlooks, assuming that trade talks will lead to a ceasefire and not to the imposition of more Trump tariffs on December 15.

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes 1 - US–China Trade War

US financial markets may celebrate a ceasefire as an alternative preferable to an economic shooting war. So it may be that less tariff shooting is better than more tariff shooting. But we must remember that Trump likes the money from the tariffs. The US is collecting those tariffs from American firms, and the amount they produce is now paying about one fourth of the interest bill on the US net debt.

Trump and his lackey Peter Navarro claim that China is paying the tariffs, but that simply isn’t true. Tariffs are a sales tax on Americans. They are a direct tax on the US consumer, masquerading (with the political help of noted Fox News “economists” like Hannity and Carlson) as tariffs China has to pay. Just check the price of a washing machine now versus the pre-tariff era three years ago.

Readers are encouraged to monitor the China news flow from independent sources. China is suffering large internal credit problems. And it has a massive swine fever epidemic.

But don’t expect China to react the way a Western democracy does in the face of a crisis. China is an autocratic system with a single political party. It has no election calendar, no primary debates, and is a mostly closed system, even in today’s electronic communications world.

China appears to have incarcerated upwards of a million of people in “re-education centers” in predominantly Muslim Xinjiang Province (source: Reuters, https://www.reuters.com/article/us-china-xinjiang-rights/15-million-muslims-could-be-detained-in-chinas-xinjiang-academic-idUSKCN1QU2MQ), much as it has suppressed other factions of its populace over many decades. Those of us who are older remember the Cultural Revolution of 1966–76, during which the communist government of Mao Zedong killed millions of people and persecuted tens of millions more (Source: Wikipedia, https://en.wikipedia.org/wiki/Cultural_Revolution).

We remember the way Nixon and Kissinger opened the first dialogue with China, and we remember the hoped-for thaw under Deng Xiaoping. Nearly a half century later, we now witness a serious, expansive Chinese military buildup in the South China Sea. We see the Chinese regime in protracted negotiations with the US but without having to budge on terms.

And now we have the Hong Kong protests, the US House of Representatives responding by passing the Hong Kong Human Rights and Democracy Act (HKHRDA), and Beijing saying it will retaliate (“‘Strong Countermeasures’: After U.S. House Passes Bills Backing Hong Kong Protests, China Threatens Retaliation,” Fortune, Oct. 16, 2019, https://fortune.com/2019/10/16/hong-kong-china-hkhrda-congress/). There were actually two Hong Kong bills passed. HKHRDA puts Hong Kong’s trade status with the US under annual review to determine whether Hong Kong is sufficiently autonomous from China to warrant special treatment. The PROTECT Hong Kong Act prohibits US companies from exporting tear gas, rubber bullets, and other crowd-control equipment for use by Hong Kong authorities.

HKHRDA also allows sanctions on specific individuals. That is a key provision, and efforts to work around it will trigger additional trade negotiations. The Chinese and the Americans negotiate side letters and implementation details to circumvent such sanctions. Look carefully at these details in any press releases or other texts. Read both the English version and the Chinese version in a neutral English translation if you don’t have a reliable source fluent in Mandarin.

Unfortunately, the ban that the PROTECT Hong Kong Act imposes may make the Congressmen who voted for the act feel good, but in the real world the act is meaningless. It forces the Chinese to turn to other suppliers but won’t prevent any violence against protesters. It might actually encourage the use of lethal ammunition, and it might lead to growing numbers of surreptitious arrests for more “re-education.”

The Congress passed the Hong Kong bills on an overwhelming bipartisan vote, and Trump signed them. He had little choice, since any veto would have been overridden.

Finally, the financial markets are starting to worry about the capital structure in Hong Kong. They have dodged warning shots from the protestors, from the HK governing body, and from the escalating tensions between China and the US. The “one-country, two systems” framework instituted by Beijing when China regained sovereignty over Hong Kong in 1997 idea is not due to expire until 2047, but the protests could lead to an accelerated expiration. Beijing will decide on the timing no matter what the US Congress says or does. And painful though the reality may be, it is doubtful that the Hong Kong protest movement can prevail against Chinese might.

Meanwhile, the HK financial sector is still important but not as relevant as it used to be in global finance. Watch what the Hong Kong Monetary Authority does in managing the HK dollar versus the US dollar. Look for changes in interest-rate spreads between the two currencies – the spreads represent a market-based pricing of the perceived risks. Also look for further capital flight from Mainland China and from HK.

Forecast for 2020: There will be no settlement in the Trump Trade War, nor will there be a reduction in China-US tensions. Markets discounting anything more than a ceasefire are making an erroneous assumption.

Dear readers, nothing would please us more than to be wrong with this forecast, but our job is not to base management decisions on hope; it is to base them on realistic assessments. Sometimes realism is more difficult. Hope is not a strategy at Cumberland.

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

The complete series of Year-End & 2020 Forecast Notes can be found here:
Cumberland Advisors Market Commentaries – Year-End & 2020 Forecast Notes by David R. Kotok


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.

Sign up for our FREE Cumberland Market Commentaries

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 Market Commentaries – Year-End & 2020 Forecast Notes by David R. Kotok

For your convenience we offer the links below to our series of “Year-End & 2020 Forecast Notes” market commentaries by David R. Kotok.

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes

Year-End & 2020 Forecast Note #1: US–China Trade War
https://www.cumber.com/cumberland-advisors-market-commentary-year-end-2020-forecast-note-1-us-china-trade-war/


Year-End & 2020 Forecast Note #2: A Vulnerable Trajectory for Stock Prices
https://www.cumber.com/cumberland-advisors-market-commentary-year-end-2020-forecast-note-2-a-vulnerable-trajectory-for-stock-prices/


Year-End & 2020 Forecast Note #3: Potential Volatility Driven by US Politics
https://www.cumber.com/cumberland-advisors-market-commentary-year-end-2020-forecast-note-3-potential-volatility-driven-by-us-politics/


Year-End & 2020 Forecast Note #4: Inflation
https://www.cumber.com/cumberland-advisors-market-commentary-year-end-2020-forecast-note-4-inflation/


Year-End & 2020 Forecast Note #5: Pending…


 

Please feel free to contact David with any questions or comments:

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




Cumberland Advisors Week in Review (Nov 25, 2019 – Nov 29, 2019)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team.

Week In Review

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.

CUMBERLAND ADVISORS’ WEEKLY RECAP

As part of Cumberland Advisors’ continuous effort to maintain strong customer relationships, we offer this week’s short video discussing current market conditions and how we are positioning portfolios.


 

Welcome back from Thanksgiving!

This week, we talk about:

-What might be coming up next week that could be a cause for concern
-What we see this week in the market that we liked, including
—Small Cap & Mid Cap continue their bid (they had been poor relative performers vs. S&P/Large Cap)
—Biotech in particular had a nice bid this week
-On the international scene, the August bottom in Europe looks like it’s holding
—Much of the negative rates we’ve seen have improved
-Asia may continue to win/lose, reacting to trade talks
-Pullbacks

Watch in the video player above or at this link: https://youtu.be/yVz47LfUHuw

Have a great weekend and thank you for joining us at Cumberland Advisors.

Matt enjoys your feedback. You can reach him at:
-Link to Matt’s Email: Matthew.McAleer@Cumber.com
-Link to Matt’s Twitter: https://twitter.com/MattMcAleer4
-Link to Matt’s LinkedIn: https://www.linkedin.com/in/matthew-c-mcaleer/
-Call Matt: (800) 257-7013

Or email us at info@cumber.com or give us a call at (800) 257-7013


FAANG stocks hit hard by U.S.-China trade war

Yahoo Finance Highlight: The trade war rages on

Yahoo Finance Highlight: The trade war rages on Nov 22, 2019

Watch the video from Yahoo Finance at this link: https://finance.yahoo.com/video/trade-war-rages-141444340.html

Yahoo Finance’s Adam Shapiro, Julie Hyman, Dan Roberts and Cumberland Advisors Chairman & CIO David Kotok discuss how the trade war has ruined relations between the U.S. and China and how [Continued…]


Cumberland Advisors Market Commentary – UK Voters’ Dilemma: Johnson or Corbyn?

Author: William Witherell, Ph.D., Post Date: November 27, 2019

Cumberland Advisors Market Commentary by William "Bill" Witherell, Ph.D.

On December 12th, UK voters will participate in a general election to determine the composition of the next government. The manifestos of both the Conservative Party and the Labor Party contain elements that should concern investors. Jeremy Corbyn’s hard-left Labor Party intends to convert the UK into a socialist economy through sweeping nationalizations (railways, broadband [Continued…] https://www.cumber.com/cumberland-advisors-market-commentary-uk-voters-dilemma-johnson-or-corbyn/


Cumberland Advisors Market Commentary – NIRP, Lagarde, Trump, Dickens & Holidays

Author: David R. Kotok, Post Date: November 25, 2019

Market Commentary - Cumberland Advisors - NIRP (David Kotok)

Negative-interest-rate policies (NIRP) have been criticized by some (me included) and pursued by others, including Europeans aligned with former European Central Bank (ECB) president Mario Draghi. However, growing numbers of Europeans are becoming disenchanted with NIRP, and some are now shifting away from it. In our view, negative rates have, predictably, damaged growth for over five years. The ECB’s new president, Christine Lagarde, seems to understand that she faces a daunting task in extricating ECB policy from reliance upon negative rates.

Here is an excerpt from her first speech:

“In my view, since our challenges are common ones, we must meet them with a common response. This involves moving towards a new European policy mix, which has a number of key elements. The first is monetary policy, which I start with because it is my area of responsibility and which will undergo a strategic review due to begin in the near future.”

Hat tip to Kevin Humphreys for the reference. Kevin is manager, European money markets, for BGC Partners. He is based in London. Kevin has kindly given us permission to share his observations with our readers. We completely agree with his view.

“Having had a few references of late from board members to potential side-effects of European Central Bank monetary policy, it was perhaps of little surprise that the ECB in their financial stability report should highlight that sub-zero interest rates have forced large investors to take on more risks and businesses to take on more debt. Equally unremarkable were the other two main observations, that bank profitability prospects have weakened and that mispriced assets may represent a vulnerability.

[Continued…] https://www.cumber.com/cumberland-advisors-market-commentary-nirp-lagarde-trump-dickens-holidays/


The MoneyShow Orlando 2020


John Mousseau at the Money Show Orlando

John R. Mousseau, CFA, will be joining a large gathering of members of Wall Street’s financial community in Orlando this winter season for The MoneyShow Orlando 2020. The three days of the conference will focus on new investment ideas that address the current economic and geopolitical environment and will feature tools, strategies, and advice which may help you better position your portfolio.

John will be a featured speaker, giving a review of the bond market in the past year (2019) and what we should expect from the bond market in a presidential election year.

To join John in February 2020 or learn more, please visit: https://conferences.moneyshow.com/moneyshow-orlando/


Bloomberg Surveillance: Negative Interest Rates with Kotok (Radio Podcast)

Author: David R. Kotok, Post Date: November 27, 2019

Cumberland Advisors’ David R. Kotok talks about negative interest rates, NIRP, and says the European Central Bank’s (ECB) Christine Lagarde has a difficult task right now.

Cumberland's David Kotok on Bloomberg Radio

He also discusses China, the pork shortage, and the impact of viruses on the global food supply.

Running time 25:02, David is introduced at the 10:45 mark – Play Episode:  https://www.bloomberg.com/news/audio/2019-11-27/surveillance-negative-interest-rates-with-kotok-podcast

Also see David’s Nov 25, 2019 commentary on NIRP: https://www.cumber.com/cumberland-advisors-market-commentary-nirp-lagarde-trump-dickens-holidays/


From Yahoo Finance

Charles Schwab is reportedly buying TD Ameritrade. “The hidden piece of this for investors is the yield on the money market fund, the yield on the sweep,” @CumberlandADV Chiarman David Kotok says. “And they tend not to look at it, and so there’s a widening margin.”


Negative interest rates aren’t working

Excerpt from ForexLive’s “Negative interest rates aren’t working”

Nov, 25 2019

Author: Adam Button

There haven’t been any victories in the negative-rate world.

The ultimate test of any theory is in the results.

The idea behind negative interest rates is that they will spur borrowing and economic activity, leading to inflation and a weaker currency.

It may be too soon to judge the results but the early returns are poor. Earlier this month the CME looked at the results of negative rates in four regions: the eurozone, Japan, Sweden and Switzerland. They all went negative between 2014 and 2016.

None of the four “have achieved their inflation targets as a result of negative deposit rates,” the CME writes.

Moreover, the negative-rate experiment so far has failed to stimulate growth sustainably. Early returns in Japan, the eurozone and Sweden were solid but GDP has slumped back close to zero.

David Kotok of Cumberland Advisors is out with a paper attacking negative rates.

The notional pricing of the trillions of dollars and euros in swaps and derivatives is thrown into disarray. As a result, the banks and market agents sponsoring those derivatives must raise their pricing to protect themselves from this added risk induced by NIRP. When they raise their pricing, they add to transactional costs and therefore suppress economic activity at the margin. That is a reason NIRP slows growth and raises risk.

Read the full article at ForexLive’s website: https://www.forexlive.com/news/!/negative-interest-rates-arent-working-20191125

 


In Case You Missed It…

Florida’s Red Tide: Possible causes, Who’s to blame?

Author: John R. Mousseau, CFA, Post Date: September 15, 2018

Jim Roemer (A.K.A. Dr. Weather) has been forecasting for the commodity and ski industry for over 30 years . He splits his time between Sarasota, Florida and Vermont, and has a deep passion and concern about the environment and climate. We found his work titled, “Florida’s Red Tide: Possible causes, Who’s to blame? Implications to humans and how it can be resolved,” to be interesting and of interest to our audience. With his permission and our thanks to Jim, we share it with you today. You can find out more about Jim Roemer at his website, https://www.bestweatherinc.com.

John R. Mousseau, CFA
President and CEO
Email | Bio

Florida’s Red Tide: Possible causes, Who’s to blame?


Florida’s Red Tide: Possible causes, Who’s to blame?
Implications to humans and how it can be resolved

As a steward of trying to bring more awareness to people about global warming and protecting our environment, seeing and smelling, the Red Tide Algae in Florida, is particularly bothersome.

THE FIRST THING you notice is the smell. It’s not a scent, exactly, but a tingling in the nose that quickly spreads to the throat and burns the lungs. But then you see the carcasses.

I moved to Florida 10 years ago to enjoy the Florida beaches, but have seen first hand how Red Tide has gotten worse over the years. In the past, hurricanes such as Katrina, Irma, etc. were thought to add to the problem, but actually, we need some sort of tropical weather system to churn up the waters. This would potentially mix up and move toxins, if only temporarily. It’s ironic to think about a hurricane actually benefiting Florida, after the many disasters the Sunshine State has witnessed over the years. However, a weak system could actually be beneficial to Florida.

RED TIDE–“It’s killing sea life, battering our economy and making people sick,” says a recent Florida TV ad. “Red tide continues to devastate our area. And many feel it’s fair to blame Rick Scott.” The blame assertion is lifted from an Orlando Sentinel editorial, which appears on screen.

[Continued…] https://www.cumber.com/floridas-red-tide-possible-causes-whos-to-blame/


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 Market Commentary – UK Voters’ Dilemma: Johnson or Corbyn?

On December 12th, UK voters will participate in a general election to determine the composition of the next government. The manifestos of both the Conservative Party and the Labor Party contain elements that should concern investors.
Cumberland Advisors Market Commentary by William "Bill" Witherell, Ph.D.
Jeremy Corbyn’s hard-left Labor Party intends to convert the UK into a socialist economy through sweeping nationalizations (railways, broadband infrastructure, postal services, energy utilities, and water), large increases in taxes on business and investments, and seizure of 10% of the equity of large corporations, along with a massive increase in government spending and investment. While they had a chance to win voters who have had enough of the years of austerity and slow growth under the Conservatives, Labor instead promises attacks on the private sector and investors which can only reduce prosperity. The Financial Times, pulling no punches, calls the Labor manifesto “a recipe for decline” that “will wreck the UK economy.”

The Conservative (Tory) Party, with a sizable lead in the polls, presents a more business- and investor-friendly election manifesto but with its leader Boris Johnson’s populist tilt. Modest spending increases are coupled with a pledge not to increase taxes, a commitment that may prove difficult to fulfill. Investors certainly will not welcome the Conservatives’ putting the risk of a no-deal Brexit very much back on the table, nor the unrealistic trade-deal plans they have promised. More on Brexit prospects below.

Neither of the leaders of the two major parties inspires confidence. Corbyn and his close advisers have moved the Labor Party to the far left. His apparent desire for a near-Soviet form of socialist economy is coupled with charges that he has been friendly with terrorist organizations and tolerates anti-Semitism in the party. Johnson’s brief, unimpressive period as prime minister, which has included an illegal five-week suspension of Parliament, an instance of lying to the Queen, and the loss of his working majority due to splitting his party, caps a history of purveying populist misinformation and resorting to bluster, including offensive comments about Muslim women, black people, and gay people. Joanne Kate Swinson’s centrist Liberal Democrat (Lib Dem) party has little chance of securing a majority, with its 11 percent support in recent polls, but could come to play an important role should neither the Tories nor Labor secure an outright majority.

The issue of Brexit is central to this general election. This is not surprising, as the public is sharply divided, as are the two major parties, on the question as to whether the UK should leave the European Union, and if it leaves, on what terms. The Tory election manifesto is titled “Get Brexit Done, Unleash Britain’s Potential.” They promise to get the UK out of the EU by the end of January 2020, by passing the Withdrawal Agreement Johnson agreed with the EU. That looks doable if the Tories win a majority. However, Johnson has set December 31, 2020, as the deadline for completing negotiations on the future trade relations of the UK with the EU, ruling out any extension of this period. This timetable looks highly unrealistic for such a complicated negotiation and raises a new, serious risk of the UK’s leaving the EU at the end of 2020 without such an agreement, that is, of there being a highly disruptive no-deal Brexit. Moreover, Johnson promises to have 80 percent of the UK’s trade covered by free trade agreements with the other main trading partners within the next three years, another very difficult and probably impossible outcome.

Under a Labor government, Brexit uncertainty would extend for some time as well. Corbyn, faced with a split in the Labor Party on the Brexit issue, is taking a neutral position on Brexit. Labor is calling for a renegotiation of the Withdrawal Agreement, aimed at achieving a “less hard” Brexit and then a referendum on the resulting agreement. This would open the possibility that the public could vote to reject the agreement and remain in the EU.

The Lib Dems have presented a confusing message with respect to Brexit. They started with the promise to have a second referendum to permit the public to again decide whether to exit the EU or to remain. They then replaced that idea with a promise to scrap Brexit by revoking the Article 50 exit process, placing the party fully in the “remain” column.

The polls continue to project a Conservative majority, and such an outcome appears to be priced into the market along with an assumption that a no-deal Brexit will be avoided. Over the last 90 days, covering a period beginning with high Brexit uncertainty and ending with the prospect of a Tory victory in a general election, the iShares MSCI United Kingdom ETF, EWU, has gained 10.13% on a total-return basis, which is above the 9.61% gain of the iShares MSCI Eurozone ETF, EZU.

A Tory victory would likely yield the most positive near-term developments for the UK economy. The Brexit uncertainties have discouraged business investment and contributed to slowing the UK economy almost to a standstill in the current quarter. Reducing these uncertainties should permit GDP growth in 2020 to pick up to a pace of 1.5%, compared with 1.3% this year and a quarter-to-quarter advance of just 0.2% in the current quarter. However, beyond 2020 the negative effects of the UK’s breaking away from the EU and its Common Market with either the relatively “hard Brexit” that Johnson promises or, worse, a “no-deal Brexit” will have a dampening effect on the UK economy. The uncertainties will linger until trade negotiations to establish free trade agreements with the EU, the US, Japan, and others are successfully concluded.

The chances for either Labor or the Lib Dems to win an outright majority appear to be limited. But a hung Parliament with no party’s having a working majority could occur. That outcome would lead to a more extended period of Brexit and to economic policy uncertainty. Should the Lib Dem Party become king-maker, the prospects for a softer Brexit or even remaining in the EU would increase. Should Labor play a role in a coalition government, its radical economic plans would likely have to be moderated, and again the prospects would be higher for a softer Brexit or a second referendum, possibly leading to the UK’s remaining in the EU. The Scottish National Party could play a role in exchange for support for a second independence referendum. The heightened and extended uncertainty that would follow a hung Parliament would be a significant drag on the economy and the stock market in 2020.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio
_______________________________________________________________

Sources: Financial Times, Barclays, Goldman Sachs Research, BBC.com, The Economist, cnbc.com.


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.

Sign up for our FREE Cumberland Market Commentaries

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 Market Commentary – NIRP, Lagarde, Trump, Dickens & Holidays

Negative-interest-rate policies (NIRP) have been criticized by some (me included) and pursued by others, including Europeans aligned with former European Central Bank (ECB) president Mario Draghi. However, growing numbers of Europeans are becoming disenchanted with NIRP, and some are now shifting away from it.

Market Commentary - Cumberland Advisors - NIRP (David Kotok)

In our view, negative rates have, predictably, damaged growth for over five years. The ECB’s new president, Christine Lagarde, seems to understand that she faces a daunting task in extricating ECB policy from reliance upon negative rates.

Here is an excerpt from her first speech:

“In my view, since our challenges are common ones, we must meet them with a common response. This involves moving towards a new European policy mix, which has a number of key elements. The first is monetary policy, which I start with because it is my area of responsibility and which will undergo a strategic review due to begin in the near future.”

Hat tip to Kevin Humphreys for the reference. Kevin is manager, European money markets, for BGC Partners. He is based in London. Kevin has kindly given us permission to share his observations with our readers. We completely agree with his view.

“Having had a few references of late from board members to potential side-effects of European Central Bank monetary policy, it was perhaps of little surprise that the ECB in their financial stability report should highlight that sub-zero interest rates have forced large investors to take on more risks and businesses to take on more debt. Equally unremarkable were the other two main observations, that bank profitability prospects have weakened and that mispriced assets may represent a vulnerability.

“What is remarkable is that the ECB seemingly deem that this has all happened independently of their actions, that while they are guardians of the Eurosystem and all that operate within it, they are mere observers. Hold up! What about the 1,988 days since they took EA rates negative (in the form of the short-date steering Deposit Facility rate)? Since then we have dropped a further 50 basis points, the Eurosystem liquidity excess has swollen from €116billion to €1.764 trillion due to outright asset purchases and other schemes, with only minimal relief for banks arriving recently, coming in the shape of excess reserve balance tiering introduced on October 30th.

“So are these 4 identified key risks in the report really some random confluence of factors? No! Not in the slightest! All of these factors and risks are a direct consequence of ECB policy actions.

“One aspect of the beginning of the tenure of Mrs. Christine Lagarde as president of the European Central Bank has been the assumption that her significant political skills will be deployed to bring together governing council members who are assumed to be somehow fragmented right now due to differing policy views, though that may not be the only area her talents are in play. There is no doubt that Mrs. Lagarde honed her negotiation skills during her time as Managing Director of the IMF, where she became one of the few to come through the fall-out of the financial crisis with credentials enhanced, though the assumption that all of her efforts will be spent on just the Governing Council itself could be misplaced. Her predecessor Mr. Draghi often spoke of the need for ‘other actors’ to step up to the plate, and Mrs. Lagarde will undoubtedly use her skills in driving this message forward, while at the same time bringing all functions of the ECB onboard.”

Let’s return to NIRP.

At NIRP’s peak, there was about $17 trillion in negative-interest-rate debt trading in the world. That is a market-based pricing reference (Bloomberg, BIS). In the latest serious paper on the subject, by the Bank for International Settlements (BIS), this organization of global central bankers downplays the damaging qualities of NIRP and tries respectfully to defend negative rates, even as it sponsors the notion of resuming normalcy. The paper, CGFS Paper No. 63, “Unconventional monetary policy tools: a cross-country analysis,” was prepared by a working group chaired by Simon M. Potter (Federal Reserve Bank of New York) and Frank Smets (European Central Bank) and published in October 2019. Very observant readers may note that Simon Potter was still at the Federal Reserve Bank of New York at the time of the writing of this report. The paper is available here: https://www.bis.org/publ/cgfs63.htm.

Office-holding central bankers frequently seem to have trouble admitting their errors. Former central bankers are often more direct. Their growing criticisms of NIRP have been clear and forceful and have not fallen entirely on deaf ears. Now, some central banks in Europe are actually shifting their policies to reverse negative rates and commence a return up to zero and then to positive rates and more normalcy.

Meanwhile, in America, President Trump, who incessantly bashes the Federal Reserve and its chair, Jay Powell, recently tweeted again that America should pursue negative rates, because, he believes, that is how we can compete with Europe. Here is the October 29 text of @realDonaldTrump on the subject of NIRP:

Trump repeated his call for NIRP immediately following his recent meeting with Jay Powell and Treasury Secretary Steve Mnuchin. Trump’s inadequacy in monetary economics is confirmed by his quotes. The president is alone on this NIRP quest. His own closest advisers, including Larry Kudlow and Steve Mnuchin, know that negative rates are poisonous. They remain dutifully silent. Fortunately, the Federal Reserve and Jay Powell join most of America’s market agents in ignoring Trump’s Twitter storms. We do, as well. It is clear that our current president knows nothing about monetary policy.

Let’s get to why NIRP has been so damaging over time.

A little history is important. The US did not dive into NIRP in the aftermath of the financial crisis a decade ago. The reasons it didn’t have been subject to debate. There was certainly some discussion of NIRP. Ben Bernanke has admitted that he thought about negative rates during the financial crisis. He has stated that he didn’t pursue them because he was worried that NIRP would risk a meltdown in US money market funds. That was shortly after the failure of the Reserve Fund during the crisis period. The Reserve Fund failed because Lehman failed and the Reserve Fund had large holdings of Lehman paper; hence, it “broke the buck” when the net asset value went under par. That vulnerability triggered emergency actions by the Federal Reserve to restore confidence in money market funds and separately in bank deposits.

At the time of its failure, Lehman was a primary dealer with the Federal Reserve. Market agents viewed primary dealers as a “private club” whose membership protected the members from failure. Market agents had already seen Bear Stearns merged instead of failing. They had already seen Countrywide merged instead of failing. It took Lehman’s failure to undermine the myth that the Fed would save primary dealers regardless of costs.

The bottom line is that the US dodged a bullet and didn’t resort to negative rates (NIRP). The US stopped at zero (ZIRP).

Readers, please note that this is a very simplistic discussion of history. The various central banking moves and policy shifts during the financial crisis require textbook-level analysis to understand. Many excellent references now exist. That worthwhile study lies beyond the limitations of this essay.

To understand how NIRP creates damage, one has to grasp the notion of “forward rates.” Here is the classic definition: “A forward rate is an interest rate applicable to a financial transaction that will take place in the future.” Now combine that concept with the corresponding notion in the currency markets. Here is that definition: Currency forward contracts and futures contracts can be used to hedge the currency risk. For example, a company expecting to receive €20 million in 90 days can enter into a forward contract to deliver the €20 million and receive equivalent US dollars in 90 days at an exchange rate specified today. Source: https://xplaind.com/133260/forward-exchange-rate.

Let’s do a simple transaction and then demonstrate it with a graphic. When the yield curve is with positive rates (above zero) and positively sloped, forward rates are computed by traditional methods. Here’s a basic calculation. Assume that the one-year rate is 1%. And assume that the two-year rate is 2%. So a borrower or lender or saver or investor has to decide on one year versus two years. We can compute the forward rate estimate for a one-year term, one year from today. Obviously, that would be 3%. In other words, there is no difference in final outcome between a one-year period for 1% and a second one-year period for 3% versus a two-year period at 2%. After two years the outcome is the same. I’ve purposely ignored technical points such as a compounding factor, semiannual payments of interest, and other conventions.

The business decision for each party is whether to take a one-year term and a second one-year term or to lock up a two-year term. The decision is based on the market agent’s opinion on what the rate for a one-year term will be, one year from the beginning. Note that the business parties can do notional interest-rate swaps as derivative transactions and take either side of the bet. Also note that a “positive carry” exists for the agent who gets paid the two-year rate while paying the one-year rate and taking the risk on the second year. That is how an interest-rate swap works.

Now think of this and combine the forward interest-rate calculation with the forward currency exchange rate. Here the market agent injects a cross-border component into the transaction. The question becomes, what will the exchange rate be one year from now, and what will it be two years from now? There are futures markets pricing those expectations every day.

In an international transaction the payments mechanism requires both the forward interest-rate mechanism and the forward exchange-rate mechanism. These are very large and liquid markets. Global analysts follow them minute by minute every trading day. At Cumberland our investment committee and all portfolio managers receive them daily and in the morning at market openings.

The combination of currency risk and interest-rate risk is complex enough when all interest rates are positive. Again, these transactions are usually found in the notional derivatives among major financial institutions. BIS estimates that the total notional derivative amounts outstanding exceed $500 trillion. The underlying gross market value of those contracts is estimated at about $13 trillion.

Enter NIRP, and it gets a little crazy.

Try this for an example. The one-year term is a negative interest rate of 1%. The two-year is a negative interest rate of 2%. Thus the forward rate for the one-year term one year from now is a negative interest rate of 3%. Naturally, we would be puzzled by such an extreme outcome.

We’ve created a stylized concept chart showing the example above, using yield curves starting at 0.50% in USD and -0.50% in euro. We’ve extended those curves to ten years. Note that the yield in ten years is 2.9% in USD and -2.9% in euros. Thus the yield at the ten-year maturity is less extreme than the forward rate at the one-year or two-year tenor. Remember, this is a concept chart for descriptive purposes; the actual rates will follow in other charts. Here is the concept chart:

Negative-interest-rate-policies-NIRP-Slide-1

You can view a larger version of this chart here: https://www.cumber.com/wp-content/uploads/2019/11/Negative-interest-rate-policies-NIRP-Slide-1.jpg.

Suppose these simplistic explanatory examples are the actual positive and negative yields, and further suppose that the positive yield is in US dollars and the negative yield is in euros. Try to guess what the foreign currency forward rate has to be in year two. Please note that we are using hypothetical and symmetrical yield curves for simplicity’s sake. In the real world these curves change constantly and are not symmetrical. They also involve numerous currencies and not just the USD and euro.

It is in that real-world trading (guessing) game that NIRP does its damage. Think of it this way as we continue to refer to the concept chart. At the front end of the series, the USD positive rate of 0.5% and the euro negative rate of -0.5% present a spread of 1%. At the one-year maturity, the positive rate of 1% in dollars and the negative rate of 1% in euros combine to present a 2% spread between dollars and euros. Simultaneously, the positive rate of 2% USD at the two-year term and the negative rate of 2% on the euro create a spread of 4% at the two-year term. Let’s stop and summarize: 1% spread at shortest term, 2% spread at one-year term, and 4% spread at two-year term.

But what happened with forward rates? Because of NIRP, the forward rate for the second-year results in a 6% spread. Why? Because the dollar forward in year two was positive 3% and the euro forward in year two was a negative 3%. Now you have an impossible pricing model. Rates linked between the two currencies would create a yield curve of 1% to 2% into a spread curve of 2% to 4% with 6% in between. How can any business transaction manage its way through that?

Furthermore, the notional pricing of the trillions of dollars and euros in swaps and derivatives is thrown into disarray. As a result, the banks and market agents sponsoring those derivatives must raise their pricing to protect themselves from this added risk induced by NIRP. When they raise their pricing, they add to transactional costs and therefore suppress economic activity at the margin. That is a reason NIRP slows growth and raises risk.

Also remember that the carrying risk is reversed with NIRP. In the USD conceptual example we created, the swap party is paid for the risk by taking the longer side of the derivative. Recall that the two-year USD was getting paid 2% while paying the one-year 1%. The reverse is true in NIRP. Because NIRP is a penalty system, the bias favors the shorter term since the penalty is smaller. Why pay 2% for a two-year risk and select two years versus paying only 1% for a one-year risk? So NIRP reverses the order of the intuitive risk/reward system. Hence the USD agents are buyers of the longer term while the euro agents are sellers of the longer term. This is the place where the derivative markets intersect with the actual markets. Prices of longer-term USD assets are bid up while prices of shorter-term NIRP euro assets are favored.

However, USD bond prices (really all asset prices) fluctuate more than those of euro NIRP-influenced assets. This may help explain the stellar relative performance of the US asset markets relative to their European counterparts. The reason is that the USD assets are mostly of longer and intermediate maturity and therefore more volatile. (This is how the concept of duration works.)

Remember, the US Fed anchors the interest rate (fed funds and IOER) in the very short-term end of the yield curve. Thus the farther away an asset maturity is from the central bank’s anchorage, the more volatile (in both directions) the asset price is. In Europe, the ECB is using a two-rate structure (short-term rate and TLTRO, which is an intermediate-term rate). That dampens volatility, as the ECB policy now targets two different maturity positions on the yield curve. As soon as a central bank targets two points on the yield curve, market agents can quickly use forward rates to fill in the rest of the yield curve.

Note that what I have described above works to gradually flatten yield curves in both euros and USD. In theory the curves eventually become parallel, and only the currency futures derivatives determine their shapes. At this point the power of the monetary authority is really fully neutralized. We may be at that juncture today.

While the numbers used above may seem extreme, the concept applied is not. These types of transactions occur continually. Between major financial institutions, they are usually booked as notional derivative entries by the largest banks that handle these transactions for the business agents.

Take the example of an American hospital purchasing medical equipment from a German company like Siemens. For the American organization, the contract is payable in US dollars. Siemens wants to receive euros. Assume that the time differential between placing the order and completing delivery is two years. Assume that there are progress payments due midway, at the one-year maturity.

How is the transaction handled? Complex notional derivatives capture the forward rates in interest payments made in dollars and euros and also the forward currency exchange risk. Those contracts are computed off the respective yield curves in both countries. They are a derivative with a positive interest rate on one side and a negative rate on the other side.

Readers can quickly see how much cost will be added to the equipment sale because of this unusual circumstance. Both the German and American firms will confront cost increases. And that macroeconomic effect becomes a financing challenge to both parties and exerts a downward pressure on economic activity. The American firm may defer the purchase, and the German firm may experience a manufacturing slowdown. Both suffer from the exaggeration of transaction costs created by NIRP.

In the simple example used above, the one-year forward rate advances from a 2% spread in the first year to a 6% spread in the second year. That scenario causes market agents in both currencies to engage in secondary transactions since they know the spread makes no sense. They commit to other derivative spreads, and that strategy eventually acts to flatten the yield curves in both currencies.

Now look at the shape of the yield curves when negative rates were first introduced in Europe. The negative-rate countries eventually reached a negative inversion. The positively sloped US dollar yield curves faced flattening pressures. Today both curves are flattish. That is what we had to expect when this bizarre NIRP policy was implemented five years ago.

Below we are going to show this phenomenon with a series of charts we used in a private briefing speech to the YPO-Gold organization. This is a group of present and former CEOs who were part of the Young Presidents Organization during earlier stages of their careers.

In the chart below, readers can see an actual, positively sloped dollar yield curve and an actual, negatively sloped euro curve. The forward rates are estimated (2.30% in USD and -1.28% in euros). The rates used in the chart are estimates from actual history.

(https://www.cumber.com/wp-content/uploads/2019/11/Negative-interest-rate-policies-NIRP-Slide-2.jpg)

The subsequent charts were selected to allow readers to see the yield curves for key events. They are for the day after the Brexit vote, the day after Trump’s election, and the day of the Swedish NIRP low of under -1.0%.

Negative-interest-rate-policies-NIRP-Slide-3

(https://www.cumber.com/wp-content/uploads/2019/11/Negative-interest-rate-policies-NIRP-Slide-3.jpg)


Negative-interest-rate-policies-NIRP-Slide-4

(https://www.cumber.com/wp-content/uploads/2019/11/Negative-interest-rate-policies-NIRP-Slide-4.jpg)


Negative-interest-rate-policies-NIRP-Slide-5

(https://www.cumber.com/wp-content/uploads/2019/11/Negative-interest-rate-policies-NIRP-Slide-5.jpg)


Note how the yield curves eventually flattened and became more and more parallel over time. That is precisely what we would expect from the construction of NIRP in one currency and positive rates in another currency (USD). Also note that we are showing five currencies. The US dollar is the positive one in all cases. The other four currencies are the euro, the Swiss franc, the Swedish krona, and the Danish krone. Now think about the complex and costly derivatives that must be constructed to arbitrage among these five currencies.

And think about the fact that the euro is the dominant currency in Europe; but the currencies of non-eurozone countries such as Switzerland, Denmark, and Sweden also have yield curves; and the banking institutions in those countries have associated counterparties, creating a multicurrency and multiparty derivative structure. That structure is what we have today. And note in the chart below how all these yields curves are even more flattened and more nearly parallel today:

Negative-interest-rate-policies-NIRP-Slide-6

(https://www.cumber.com/wp-content/uploads/2019/11/Negative-interest-rate-policies-NIRP-Slide-6.jpg)

All this is difficult enough when interest rates are positive and yield curves are positively sloped in normal structures. NIRP has made the situation much worse.

I haven’t added the effects of NIRP in destroying savings and savers’ incomes. And I haven’t added the mess created by the trade wars, which inject risk and cost into the transactions. Think of what it means to deploy a tariff in the middle of the supply chain for my American hospital/German equipment example, and you can see what a mess this quickly becomes. The consequences are spelled out in a recent article by Jean Pisani-Ferry of the Peterson Institute for International Economics, “The Euro Area Has Run Out of Pure Monetary Policy Options to Avert a Recession,” https://www.piie.com/blogs/realtime-economic-issues-watch/euro-area-has-run-out-pure-monetary-policy-options-avert.

Our conclusion: NIRP is poisonous. Always has been and always will be.

Markets are now adjusting to the prospect that NIRP will recede. The total NIRP debt aggregate has declined from $17 trillion to under $12 trillion. Markets are also discounting that scenario, as we see in changes in the yield curves of all currencies. Should the disastrous Navarro-Trump trade war policy (a protectionist policy that has demonstrably harmed what it proposes to protect) also be reversed, we can develop a positive outlook for global growth. Get rid of NIRP and of the trade war, and markets and growth rates will soar.

For now, we remain partially invested in our US stock market ETF accounts. We have taken profits in our quantitative strategies. Our bond barbells have helped us preserve “dry powder” for redeployment at higher interest rates.

Meanwhile, American politics has undertaken an assessment of Trumpian political arrogance and will determine whether a vision of unbridled presidential power prevails. The re-election of Trump is now too close to call. However, the opposition to Trump is still not clearly determined. Some of the Democratic contenders are worrisome. The coming campaign promises to be a multi-billion-dollar fiasco with endless nasty attacks and misinformation on all sides. It will be made exponentially worse by the impeachment battle. This Politico piece runs down the risks: “Why the Impeachment Fight Is Even Scarier Than You Think,” https://www.politico.com/magazine/story/2019/10/31/regime-cleavage-229895.

And we worry about the socialism advanced by leading candidates. Most recently, we witnessed the introduction of new lower estate tax thresholds in the House by Congressman Jimmy Gomez (D-Ca). (See https://gomez.house.gov/news/documentsingle.aspx?DocumentID=1783.) That bill matches democratic socialist Bernie Sanders’ Senate version and has made the Sanders-Gomez estate tax thresholds into a live bill. It won’t pass this term, but it is a possible harbinger of things to come.

And there may be a repricing of all things in financial markets. See this piece, in which Christopher Whalen of Institutional Risk Analytics reckons with Warren’s plans: “Elizabeth Warren Wants to Crash the Global Financial Markets, ”https://www.theinstitutionalriskanalyst.com/single-post/2019/10/25/Elizabeth-Warren-Wants-to-Crash-the-Global-Financial-Markets.

Okay. Lots of things to think about as we approach the holiday season. The iconic and prolific author Charles Dickens opened his famous novel A Tale of Two Cities this way: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity.”

There was no NIRP when Dickens’ life spanned the middle of the 19th century. But there were profound conflicts driven by intensely divisive politics. Some things never change.

To all clients and friends of Cumberland and to all of our colleagues in organizations whose efforts try to make the world a better place (sometimes in spite of itself), we wish you the best and safest holiday season.

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


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Cumberland Advisors Week in Review (Nov 18, 2019 – Nov 22, 2019)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team.

Week In Review

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.

CUMBERLAND ADVISORS’ WEEKLY RECAP

As part of Cumberland Advisors’ continuous effort to maintain strong customer relationships, we offer this week’s short video discussing current market conditions and how we are positioning portfolios.



We have Matt McAleer on camera this week to discuss our Quant work and indicators and the four Cumberland Advisors strategies that are involved with them. He talks about:

-Where our Quant Strategy started with Leo Chen Ph.D.
-What are “buy” signals in our Quant work?
-What are “sell” or “exit” signals in our Quant work?
-Matt outlines what sectors we’re in in response to our Quant work

Thanks for taking the time to join us!

Watch and comment online at: https://youtu.be/krnZG0DiKlU

Matt enjoys your feedback. You can reach him at:
-Link to Matt’s Email: Matthew.McAleer@Cumber.com
-Link to Matt’s Twitter: https://twitter.com/MattMcAleer4
-Link to Matt’s LinkedIn: https://www.linkedin.com/in/matthew-c-mcaleer/
-Call Matt: (800) 257-7013

Or email us at info@cumber.com or give us a call at (800) 257-7013


Cumberland Advisors in the Community

Spark-Growth-Sara-Hand-USF-Dr-Greg-Smogard-Cumberland-Advisors-Patricia-Healy-CFA
Patricia Healy, CFA (on the right) is pictured with Sara Hand of Spark Growth, TiE Tampa Bay Conference Program Chair, along with USF Sarasota-Manatee’s Dr. Greg Smogard, their innovation and business development officer.

Cumberland Advisors’ Patricia Healy, CFA and Norman Dempsey, MBA, attended the Indus Entrepreneurs (TiE) “Talk” in celebration of Global Entrepreneurship Week. The event was titled, “Funding Continuum and Landscape for Startups” and was held at the USF Sarasota-Manatee campus.

Patricia Healy (on the right) is pictured with Sara Hand of Spark Growth, TiE Tampa Bay Conference Program Chair, along with USF Sarasota-Manatee’s Dr. Greg Smogard, their innovation and business development officer.

Cumberland Advisors’ team members enjoy interacting within the communities in which we live, work and play whether it be chambers of commerce, museums, educational institutions, non-profits, or others. Watch for more collaboration with USF including Cumberland Advisors’ “Fourth Annual Financial Literacy Day: Understanding Global Markets and Finance” coming February 2020. We hope to see you around town!


Worried About a Bear Market? Bonds Pose More Danger Than Stocks.


Cumberland Advisors John MousseauBarron’s excerpt: Municipal Bonds could provide some protection against higher taxes should Elizabeth Warren become the next president. That’s the view of John R. Mousseau, president, CEO, and director of fixed income at Cumberland Advisors.

Read more: https://www.cumber.com/barrons-worried-about-a-bear-market-bonds-pose-more-danger-than-stocks/


Bloomberg Daybreak: Australia with David R. Kotok on Trade and China (Video)


Bloomberg Daybreak Australia - David Kotok talks Trade & China

David Kotok joins Bloomberg Daybreak: Australia to discuss the US-China trade relationship.

“Our view is, a full trade arrangement with China has eluded us; it’s gone. Businesses are now making decisions about location around the world. They’re changing what they’re doing. The United States is now collecting a sales tax on Americans, masquerading as a tariff. And the amount in the tariff is now paying approximately 1/4 of the interest bill on American borrowings and we have a rising deficit. And you hear the president say we’re collecting all this money. Well we are collecting it. Americans are paying it. And we see it in changes in prices. A washing machine costs 10 or 12 percent more than it did before the tariffs. So this is an unfolding story. I’m not sanguine about it and I believe markets are adjusting to the fact that this is a more permanent space. Which means pricing is different, location of businesses are different.”

Watch David’s full interview online at the Bloomberg website. He starts around the 12:30 minute mark: www.bloomberg.com


BondBuyer – Lower tuition rates may mean more downgrades in FY 2020


Cumberland-Advisors-Patricia-Healy-In-The-News

Excerpt from The Bond Buyer
By Sarah Wynn
Nov 18, 2019

Some analysts have decided to stick with highly rated bonds in the higher education sector.

“The higher education area, depending on if it’s public or private has seen some declines (in enrollment) over the years, especially in the private colleges,” said Patricia Healy, senior vice president of research and portfolio manager at Cumberland Advisors. Private universities have seen more downgrades than public universities, Healy later added.

Healy said Cumberland looks for double-A and higher single A-rated bonds because high-quality bonds tend to be more liquid and the firm tends to take a more active strategy.

Healy said her firm stopped investing in many private colleges years ago due to the continuing decline in enrollment. Healy said a decline in enrollment can be a reflection of a good economy because people are going directly into the workforce.

Continued:  https://www.cumber.com/bondbuyer-lower-tuition-rates-may-mean-more-downgrades-in-fy-2020/


Yahoo Finance Highlight: David Kotok discusses Macy’s, Target earnings & retail divide


CA-David-Kotok-Yahoo-Finance-Retail discussion

Watch the video at this link: https://www.cumber.com/yahoo-finance-highlight-david-kotok-discusses-macys-target-earnings-retail-divide/


The MoneyShow Orlando 2020


John Mousseau at the Money Show Orlando

John R. Mousseau, CFA, will be joining a large gathering of members of Wall Street’s financial community in Orlando this winter season for The MoneyShow Orlando 2020. The three days of the conference will focus on new investment ideas that address the current economic and geopolitical environment and will feature tools, strategies, and advice which may help you better position your portfolio.

John will be a featured speaker, giving a review of the bond market in the past year (2019) and what we should expect from the bond market in a presidential election year.

To join John in February 2020 or learn more, please visit: https://conferences.moneyshow.com/moneyshow-orlando/


Cumberland Advisors Market Commentary – Overshadowed?


Author: Robert Eisenbeis, Ph.D., Post Date: November 19, 2019
Federal Reserve - FOMC
Public attention this past week was riveted on the impeachment testimony before the House Intelligence Committee, which totally overshadowed Chairman Powell’s semiannual report and two days of testimony to Congress on monetary policy. That outcome is probably not a bad one, since there were no new insights provided nor any clues as to when or […]

Continued: https://www.cumber.com/cumberland-advisors-market-commentary-overshadowed/


Cumberland Advisors Market Commentary – The Warren Hedge


Author: John R. Mousseau, CFA, Post Date: November 20, 2019

Market Commentary - Cumberland Advisors - The Warren Hedge (John Mousseau)In the past few weeks Senator Elizabeth Warren has risen to be neck and neck with Joe Biden in most of the national polls for the Democratic nomination. In some of the electronic betting polls, though, Warren is ahead of Biden by 5–6 points, depending on the day. Warren has promised higher taxes, which would […]

Continued:  https://www.cumber.com/cumberland-advisors-market-commentary-the-warren-hedge/


Cumberland Advisors Market Commentary – Trade War and No Recession


Author: David R. Kotok, Post Date: November 18, 2019

Stop Digging

The United States has gotten itself into a trade war negotiations mess. (See “How Trump’s Trade War Went From Method to Madness,” https://www.bloomberg.com/news/features/2019-11-14/how-trump-s-trade-war-went-from-method-to-madness.) There is an old adage: “When you’re in a hole and it’s getting deeper, stop digging!” Trump and Co. know they’re in a mess but don’t know how to stop digging, so they have […]

Continued: https://www.cumber.com/cumberland-advisors-market-commentary-trade-war-and-no-recession/


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.

Sign up for our FREE Cumberland Market Commentaries

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.