The June FOMC

In the commentary leading up to the June meeting, I argued that some relaxation of the tariff issues with Mexico, combined with relatively good data for the US economy, would make the FOMC’s decision to hold pat on rates relatively easier.

Federal Reserve - FOMC

While the FOMC did decide at its June meeting to hold rates constant for the moment, the dot charts and dissent by President Bullard suggest that a number of participants were closer to cutting rates than they may have been previously or than observers might have expected leading up to the meeting. The statement itself, as many have noted, deleted the word , and the FOMC also dropped its characterization of ongoing economic activity from “solid” to rising at a “moderate rate.” We need to remember that the minutes of the March meeting indicated that the staff forecast had included a markdown of growth after Q1, so the change in language validates that forecast and aligns with the districts’ characterization of growth in their regions.

The deletion of the word patience really reflects two considerations. First, the Committee expressed concerns that downside risks had increased, and Chairman Powell made it clear in the press conference that those concerns were driven by uncertainty about US tariff policies and global growth. The FOMC statement did note that inflation expectations for the near term had declined, but longer-term expectations remain well anchored. Clearly, the failure to achieve its inflation objectives was not a determining factor in the FOMC’s decision to maintain current rates.

Second, while the word patience was missing, it was also the case that policy would be dependent on incoming data, and that view hadn’t changed one bit. Instead, the deletion of patience indicated the FOMC’s concern about the risks to the expansion and reflected the Committee’s shift from a “steady as you go” policy stance to “on your mark.”

How far are we from “get set, go!” is now the critical question; and at this point, as former Federal Reserve Bank of Philadelphia President Charles Plosser noted on Bloomberg Asia after the meeting, we are rather in the dark as to what the FOMC’s reaction is likely to be to the incoming data. The key incoming data for the FOMC’s July 29–30 meeting will the June jobs report on July 5 and the first look at the advance estimate for Q2 2019 GDP on July 26.

We can also glean some useful information on how the FOMC participants’ views on policy have changed from a comparison of the dot plots from March to June.

Bob Eisenbeis FOMC Chart 20190624

First, looking at the December projections, we see a significant shift and difference of opinion as to whether rates should be raised or lowered. While six people favored at least one or two rate increases in March, all but one had significantly lowered their rate recommendations in the June SEP. Eight people continued to favor holding rates between 2.25–2.5%, while all the remaining participants favored at least one rate cut by the end of 2019. Similarly, for 2020, of the 10 participants who saw rates above 2.5% in March only three now saw rates that high, while nine saw rates below 2.25%, and seven saw rates between 1.75–2.0%. Finally, for 2021, views have further diverged, probably reflecting the uncertainties that participants now feel may exist after the 2020 election. These projections appear quite bearish, given the fact the interest rates have come down in the near term from where they were in March. Mortgage rates are now hovering at about 3.9%, more than a percentage point below where they were at the end of 2018. More generally, the Chicago Fed’s National Financial Conditions Index is almost as low as it was in 2007 before the Fed started to raise rates. Given the state of the labor market and general health of the economy, it remains a puzzle as to why the FOMC has now changed its view regarding the appropriate path for interest rates going forward.

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


1) It is now clear in Fed-speak that solid means that growth is faster than “moderate,” which usually means growth at about 2.2–2.4%.


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.AAA




Cumberland Advisors Week in Review (Jun 17, 2019 – Jun 21, 2019)

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 **

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Matt McAleer is out of the office this Friday. Gabriel Hament stands in with a quick update.

  • – Happy First Day of Summer!
  • – Do you have questions regarding markets, trade, the economy, banking, or anything finance related? Send them our way and we’ll pass them on to David who is up at Camp Kotok for the June 2019 session. David is leading discussions when not fishing in an environment that invites dialogue and collisions between folks from different parts of the finance world giving them opportunities to hone and expand their perspectives under the Chatham House rule.
  • – We invite you to submit questions you have about your personal holdings. We’ll get back to you and share our thoughts and ideas about how a Cumberland investment strategy may fit in your your personal financial picture.
  • – We’re honored and excited to share with you our news: Cumberland Advisors was selected as the 2019 winner within the Professional Services category at the Sarasota Chamber of Commerce’s 29th Frank G. Berlin, Sr. Small Business Awards. Read about it here: https://www.cumber.com/cumberland-advisors-news-professional-services-business-of-the-year-award/

Watch below or at these links:

Have a great weekend and a great start to your summer!


** LATEST MARKET COMMENTARY (https://www.cumber.com/category/market-commentary/)
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2Q 2019

Review: International Equity ETF https://www.cumber.com/cumberland-advisors-market-commentary-2q-2019-review-international-equity-etf/
William Witherell, Ph.D. 06/20/2019

Market Volatility ETF Portfolio 2Q 2019 Review: Rising VIX https://www.cumber.com/cumberland-advisors-market-commentary-market-volatility-etf-portfolio-2q-2019-review-rising-vix/
Leo Chen, Ph.D. 06/19/2019

Happy Anniversary! https://www.cumber.com/cumberland-advisors-market-commentary-white-house-considers-economist-judy-shelton-for-fed-board/
David R. Kotok 06/18/2019

Turandot https://www.cumber.com/turandot/
David R. Kotok 06/13/2019

What Does “Data-Dependent” Mean? https://www.cumber.com/what-does-data-dependent-mean/
Robert Eisenbeis, Ph.D. 06/12/2019

2% or 2% or -0.2%? https://www.cumber.com/2-or-2-or-0-2/
David R. Kotok 06/10/2019

Peter Navarro https://www.cumber.com/peter-navarro/
David R. Kotok 06/07/2019

More on Tariffs https://www.cumber.com/more-on-tariffs/
Robert Eisenbeis, Ph.D. 06/06/2019

Jingoism & Rare Earths https://www.cumber.com/cumberland-advisors-market-commentary-white-house-considers-economist-judy-shelton-for-fed-board/
David R. Kotok 06/05/2019

EU Election: Negative But Could Have Been Worse https://www.cumber.com/eu-election-negative-but-could-have-been-worse/
William Witherell, Ph.D. 06/03/2019

Fed and Climate Change https://www.cumber.com/cumberland-advisors-market-commentary-fed-and-climate-change/
David R. Kotok 05/30/2019

May FOMC Minutes: Patience https://www.cumber.com/cumberland-advisors-market-commentary-may-fomc-minutes-patience/
Robert Eisenbeis, Ph.D. 05/21/2019

Memorial Day Reflections https://www.cumber.com/memorial-day-reflections/
David R. Kotok 05/27/2019

5G, Huawei, Trade War, Shooting War https://www.cumber.com/cumberland-advisors-market-commentary-5g-huawei-trade-war-shooting-war/
David R. Kotok 05/23/2019

Finally, Some Positive Trade News https://www.cumber.com/cumberland-advisors-market-commentary-finally-some-positive-trade-news/
William Witherell, Ph.D. 05/21/2019

“Nations, Wars and Liberal Democracy” by George Friedman https://www.cumber.com/cumberland-advisors-market-commentary-nations-wars-and-liberal-democracy-by-george-friedman/
George Friedman 05/20/2019

Tariffs – Macroeconomic Versus Microeconomic Effects: In the Long Run We Are All Dead https://www.cumber.com/cumberland-advisors-market-commentary-tariffs-macroeconomic-versus-microeconomic-effects-in-the-long-run-we-are-all-dead/
Robert Eisenbeis, Ph.D. 05/17/2019

Robert Brusca Ph.D. on Tariffs, Trade, and the Fed https://www.cumber.com/cumberland-advisors-market-commentary-robert-brusca-ph-d-on-tariffs-trade-and-the-fed/
Robert Brusca, Ph.D. 05/14/2019

White House Considers Economist Judy Shelton for Fed Board https://www.cumber.com/cumberland-advisors-market-commentary-white-house-considers-economist-judy-shelton-for-fed-board/
David R. Kotok 05/13/2019

Sign up or see more Market Commentary https://www.cumber.com/category/market-commentary/

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On Friday, June 14, 2019, business and community leaders gathered for the 29th Frank G. Berlin, Sr. Small Business Awards (https://www.sarasotachamber.com/small-business-awards.html) , in Sarasota, Fla. Three finalists were selected across five categories: Hospitality and Tourism, Non-Profit, Products and Services, Retail and Professional Services. We are honored to share that Cumberland Advisors was selected as the winner within the Professional Services category.


IN THE NEWS

Barron’s – Gold Is Surging. How to Play It With ETFs https://www.cumber.com/gold-is-surging-how-to-play-it-with-etfs/
Quoted: David Kotok 06/21/2019

Sarasota Herald-Tribune – USF Sarasota-Manatee scholarship to assist Visible Men Academy graduates https://www.cumber.com/usf-sarasota-manatee-scholarship-to-assist-visible-men-academy-graduates/
Quoted: David Kotok 06/21/2019

Sarasota Chamber of Commerce – Cumberland Advisors News – Professional Services Business of the Year Award https://www.cumber.com/cumberland-advisors-news-professional-services-business-of-the-year-award/
Quoted: Cumberland Advisors 06/21/2019

Barron’s – Too Many Uncertainties https://www.cumber.com/too-many-uncertainties/
Quoted: William Witherell, Ph.D. 06/21/2019

POLITICO – Trump revs up his Wayback Machine https://www.cumber.com/trump-revs-up-his-wayback-machine/
Quoted: Robert Eisenbeis, Ph.D. 06/20/2019

The Market Expects the Fed to Do Its Duty https://www.cumber.com/the-market-expects-the-fed-to-do-its-duty/
Quoted: David Kotok 06/14/2019

Bond Buyer – Municipal calendar grows to $7B as the summer reinvestment season arrives https://www.cumber.com/how-federal-tax-reform-has-impacted-real-estate/
Quoted: John R. Mousseau 05/30/2019

AdvisorHub – Large-Cap Growth Stocks Still Hold Luster https://www.cumber.com/large-cap-growth-stocks-still-hold-luster/
Quoted: David R. Kotok 05/31/2019

POLITICO – Trump’s two-front trade war triggers alarms https://www.cumber.com/trumps-two-front-trade-war-triggers-alarms/
Quoted: David R. Kotok 05/31/2019

Bloomberg – Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight https://www.cumber.com/trade-wars-hammerlock-on-bond-market-puts-lower-yields-in-sight/
Quoted: David R. Kotok 05/18/2019

CNN Business – Why the US-China trade war won’t last https://www.cumber.com/why-the-us-china-trade-war-wont-last/
Quoted: David R. Kotok 05/14/2019

POLITICO – Markets freak (a little ) https://www.cumber.com/markets-freak-a-little/
Quoted: David R. Kotok 05/08/2019

Bloomberg Radio – Bloomberg Daybreak Asia: Wear a Helmet When Doing Falconry With These Hawks https://www.cumber.com/bloomberg-daybreak-asia-wear-a-helmet-when-doing-falconry-with-these-hawks-radio/
Quoted: David R. Kotok 05/06/2019

Bloomberg Radio – The Fed Decides https://www.cumber.com/the-fed-decides-radio-podcast-bob-eisenbeis-on-bloomberg-markets/
Quoted: Robert Eisenbeis, Ph.D. 05/02/2019

WisdomTree – A Unique Lens on Risk Management https://www.cumber.com/a-unique-lens-on-risk-management/
Quoted: Matt McAleer 05/01/2019


FEATURED INTERVIEWS

Join David Kotok for recent interviews with Bloomberg & Yahoo Finance.

https://www.cumber.com/recent-tv-appearances/


IN CASE YOU MISSED IT…

Coping with Geopolitical Risk: The Case of South Korea
by David R. Kotok
May 28, 2010
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Tensions have reemerged and reached a new peak on the Korean peninsula, following the sinking of a South Korean warship with the loss of 46 sailors, after it was struck by a North Korean torpedo. South Korea moved to cut trade with the North by 50%, denied North Korean ships the use of its sea lanes, and designated the North as its “principal enemy,” a term that has not been used during the past six years of detente. South Korea is calling upon the UN to censure North Korea. The US and South Korea have announced major combined naval exercises. Finally, in what can only be considered a symbolic move, the South has resumed broadcasting propaganda songs across the border. In response, the North banned South Korean ships and planes from using its airspace and sea lanes, said it was cutting all ties with the South, and will expel all South Korean officials from a joint industrial park in the North. Ominously, there are reports that the North Korean leader, Kim Jong-il has ordered the North Korean military to be ready for war. In the most recent escalation of tensions, North Korea threatened to scrap all “military assurance agreements” with South Korea. These agreements are safeguards against accidental armed clashes. They also protect the safety of South Korean workers in that industrial enclave in the North. U.S. and South Korean forces have elevated their five-step alert level by one step to the second highest level. Continued: https://www.cumber.com/coping-with-geopolitical-risk-the-case-of-south-korea/


UPCOMING EVENTS

Our friends at The Global Interdependence Center (GIC) host conferences around the world with an emphasis on stimulating thoughtful, global dialogue on a wide range of issues that affect the international community. This June and July they’re featuring two of our folks from Cumberland Advisors.

On Monday, June 24, 2019, The Global Interdependence Center is returning to Chicago, IL for a conference with the Federal Reserve Bank of Chicago to discuss topics such as monetary policy, trade, manufacturing, productivity and labor force issues and to hear a keynote address on globalization by Catherine L. Mann, Ph.D., Global Chief Economist, Citi. John Mousseau will speak during the State of the State’s Fiscal Challenges panel session.

On Thursday, July 11, 2019, at Victor, ID, The Global Interdependence Center and the Bronze Buffalo Foundation gather economists, bankers, academics, and finance industry representatives just outside of Jackson Hole, Wyoming. The Eleventh Annual Rocky Mountain Economic Summit will bring together economists and entrepreneurs from around the country to discuss issues and opportunities relating to the global economy, featuring a talk with David R. Kotok and a keynote address delivered by Tom Barkin, the President and CEO of the Federal Reserve Bank of Richmond.

You’re invited to join John or David at one of the above events and cost and registration details can be found here: https://www.interdependence.org/events/browse/

See the original formatted Week in Review post at our Email Newsletter site and feel free to share your comments regarding this post or others: https://us8.campaign-archive.com/?u=d6f020f3bd6a1e2c4eb254e6c&id=f01d7cfd44




Cumberland Advisors Market Commentary – 2Q 2019 Review: International Equity ETF

In the next-to-last week of the second quarter, the factors that have led to high volatility in the global equity markets during the quarter are still present. Foremost among these are the destabilizing effects of rising trade and technology tensions, which are hurting the manufacturing sectors in many countries, disrupting global value chains, and weighing heavily on investment decisions.

Market Commentary - Cumberland Advisors - Review: International Equity ETF

Global trade has slowed dramatically, from a 5.5% annual pace in 2017 to a projected rate of just 2.1% for this year. The second cause of market volatility, related to the first, has been the slowdown in global economic growth and increasing concerns about the possibility of recession in major economies including the US. Along with the trade concerns, the easing of growth rates in China, India, and many other emerging markets; the contracting of the manufacturing sector and consequent weakness in Europe; and the stagnating Japanese economy have added to growth worries.

With the US economy’s also appearing to slow during the quarter, it is not surprising to see projections for global growth being marked down. The OECD is now projecting global economic growth for the current year at 3.2%, compared with 3.5% in 2018. The risks to the “fragile” world economy (as OECD’s Chief Economist Laurence Boone recently characterized it) will remain heavily on the down side unless there is a de-escalation of trade tensions. Further contributing to market uncertainties are the serious tensions between the US and Iran, the political turbulence in the United Kingdom because of the unresolved Brexit issue, and the reopening of questions about the future of Hong Kong’s relationship with Mainland China.

International equity markets have taken investors on a rollercoaster ride during the quarter to date, as of June 18. The iShares MSCI ACWI ex US ETF, ACWX, which tracks all equity markets except the US, is unchanged from the beginning of the quarter, after rising 3%, tumbling 6%, and then recovering. The advanced markets followed a similar pattern, whereas the more volatile emerging markets are down about 2%.

Looking at the year-to-date total returns for international markets, although ACWX is unchanged for the quarter, as noted above, it is up 9.25% for the year. The advanced-market iShares MSCI EAFE ETF, EFA, has done slightly better, up 9.8%, whereas the iShares MSCI Emerging Market ETF, EEM, has gained just 7.1%, losing some of the substantial gains it made in the first quarter. Going forward, our base-case projection is that the global economy has stabilized at a moderate pace and will avoid a recession, with prospects for advanced-economy equity markets, particularly that of the US, being somewhat better than for the emerging markets. We expect the US and China will agree at the G20 to resume trade negotiations and the US will hold off applying another round of tariffs. We are maintaining a cash reserve in our International and Global ETF portfolios. Our strategy could change any time.

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

______________________________________________________________
Sources:  OECD.com; HIS Markit, Financial Times, 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 – Market Volatility ETF Portfolio 2Q 2019 Review: Rising VIX

The US stock market experienced some rising volatility caused by the tariff war during the second quarter of 2019. While the S&P 500 didn’t drop by double digits in May, the volatility index, VIX, briefly touched above 20 last month. As a general rule of thumb, investors can expect a 10% correction in the stock market every year on average (though 10% is an arbitrary number and not a definitive probability). Even though the market went back up to the 2,900 level fairly quickly after the Fed signaled a possible rate cut, volatility did not follow the market rally with a proportional decrease. This could be a sign that investors have not downgraded the geopolitical risks, such as the trade war, that are embedded in the stock market.

Cumberland Advisors - Quarterly Review - Market Volatility ETF

Stock market volatility had been trending downward prior to the US’s enforcing the 25% tariff on Chinese imports. The VIX sank to an 11-level as the equity market made new all-time highs in April. The low VIX was viewed as a sign of complacency by many market participants, as the stock market staged an over 20% comeback in just four months. Interestingly, although the market is only 2% away from its all-time high, the current VIX is significantly higher than April’s low level. Although volatility is usually not the stock market’s best friend, the “uneased” volatility could be what the market needed if it were going to make another new high. Rallies tend to be fragile if volatility is simultaneously suppressed. However, a moderately high VIX suggests that traders are positioned for some downside potential. If the market can rally in this environment, that’s a healthy sign that the market may be able to set another all-time high.

Our quantitative strategy exited the last tranche and went to all cash in April. We are currently holding cash at a 2% yield, waiting for the next entry. If you have any questions, please do not hesitate to contact me.

Leo Chen, Ph.D.
Portfolio Manager & Quantitative Strategist
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.

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 – Happy Anniversary!

A half century in the investment advisory business is a long time. As the late Jack Benny would say, “It is really tough to do when you are only 39 years old.”

Cumberland Advisors Logo - 46th Happy Anniversary

I started solo. Then in 1973, Sheldon “Shep” Goldberg and I formed a partnership called Cumberland Advisors. He left New York and the rat race after an already established career path through Bache & Co. and Hutton. We occupied a two-room office in Vineland, New Jersey; we shared an administrative assistant.

June 18, 1973, is our official anniversary date. Why? Because that is the date a clerical person placed on our SEC filing papers before he or she mailed them back to us. There is nothing magical about the date. Papers then were snailmailed; your official date was selected by a bureaucrat whom you never met.

In 1973, the investor class had firsthand memories of the Depression era and of World War II and of the Korean War and of the Vietnam War. Shep and I had both served in the US military. Many of our new clients had, as well. America in those days respected people who wore a uniform, though there was an intense political debate over the draft. Military service had been nearly universal, and the nation was phasing out conscription. A history lesson can be found here:
https://en.wikipedia.org/wiki/Conscription_in_the_United_States#End_of_conscriptio.

When Shep and I started Cumberland, the citizens supported the men and women who defended the country. There were parades on holidays. And people bought poppies to honor and help veterans on Memorial Day. The nation had a sense of patriotic dedication to certain American ideals.

Many, many families had been touched in some way by one of the wars. Many of our first clients were veterans. It was a connection we had with them as we launched a new business. At least that is how I remember it.

Shep and I had a model for our business. It was a simple one. We wanted to solve the conflicts of interest that we saw prevalent in the Wall Street world. We wanted to separate the investment advisory service into one silo, put the brokerage or product compensation into another silo, and put the custody and safekeeping and reporting into a third silo. The silos had to be separately identified and separately evaluated and separately transparent. We had already seen the damage done when such a format is not used. The modern version of the opaque single silo is Madoff. We rejected that model 46 years ago. I won’t take the time to name the earlier versions that led Shep and me to decide on a “no conflicts of interest” policy. Sadly, that list is a long one.

So we launched Cumberland in the summer of 1973. A few family members and friends gave us a chance with a few hundred thousand dollars. Our opening portfolio structures totaled about $10–15 million. There were no ETFs. We used single stocks and high-grade bonds and some specially researched junk bonds.

That is how we started in the summer of 1973.

Immediately, all hell broke loose. Egypt and five other Arab countries declared war on Israel. The Yom Kippur War started in October 1973. For that history see: https://en.wikipedia.org/wiki/Yom_Kippur_War.

The 1973–74 bear stock market was brutal. The Dow Jones Industrial Average plunged from about 1000 to under 600. That’s right, 600! I remember seeing it in 1974. Cumberland’s first stock market cycle was marked by a 40% drop.

The bond market fell apart. Fed chairman Arthur Burns was trying to fight a recession and inflation at the same time. Interest rates hit their highest level since the Civil War. Never did we think that we would see them even higher by end of the 1970s.

The price of oil went from $3 a barrel to $12. A severe recession was rocking the US. The US dollar was under attack. President Nixon closed the “gold window,” and the Bretton Woods fixed-currency exchange-rate regime fell apart. At the same time, Watergate and the Nixon impeachment proceedings infected American politics. The most famous question then was, “What did the president know, and when did he know it?”

My partner Shep and I had picked one hell of a time to launch an investment advisory firm. No one wanted to invest in anything. Everyone was scared. There were gas lines and shortages. Airlines couldn’t get fuel. Auto companies had no sales. Business confidence had collapsed. Investor confidence was nonexistent in 1974. Politics were a hateful mess.

In November of 1974, Shep and I became fully invested in the stock market. We bought names like Boeing and General Motors and ATT. These companies were selling below their replacement values, and they did not have earnings because of the oil price shock and the recession. We suffered for about three months, and several of our new clients fired us. Then, in early 1975, things reversed; the stock market took off, and Cumberland was launched.

We had a similar shock in the late 1970s with bonds. We held off from buying bonds for several years as interest rates were rising and inflation was intensifying. Patience was required on the bond side.

I remember the first corporate bond we bought. I did that trade myself. It was a telephone subsidiary bond issued by Pacific Tel, rated AAA. It was a 30-year bond with 10-year call protection. The coupon was 12.70%. The year was 1979. Paul Volcker was the new Fed Chair, and he was determined to break the back of inflation, which had reached double digits in the US. This was the first large post-Volcker bond sale.

Two clients fired us for buying that bond. “How could you buy any bond when inflation is in double digits and headed higher?” they said.

These and many other historical experiences resonate today. The list of issues is similar: politics, recession risk, Fed policy, trade, war risk, inflation/deflation, and many other elements populate the inventory. It reminds me of the famous line in the great movie Casablanca: “Line up the usual suspects.”

I’ve seen 50 years as an investment advisor and 46 years with Cumberland. We’re now 46 people. We have 17 series 65-licensed professionals. We are in over 40 states. We measure assets under management in the billions. We’re on several major platforms. Our largest institutional clients are measured in the 10s of billions.

I have 18 partners. Of the 19 Cumberland owners, 13 of them and the majority of the shareholders work for the company. We are an independently verified GIPS company (Global Investment Performance Standards). That is the highest designation established by the CFA Institute (see https://www.cfainstitute.org/en/ethics/codes/about-gips-standards).

Our basic philosophy hasn’t changed. We still believe in separate silos. We still are fee-for-service investment advice only. We still do not sell any product on a commission. We still do not hold client assets. We still use separate custodial reporting.

I want to wish a happy anniversary to our clients and referring consultants, our staff, and our readers. At Cumberland, two members of our staff have reached a 40-year employment milestone. Each of them is a shareholder.

We are based in Sarasota. You are welcome to come and visit us.

As for me, I love this business. It is as challenging today as it was 50 years ago when I started. Maybe it is even more challenging.

The aging of the physical body is unstoppable. We can try to manage it, and we do. But the clock always wins in the end. I believe, however, that as long as the mind is cognitively sound, the challenge is to keep learning and working and exercising the brain. And try to move the arthritic bones as well. I still ride the stationary bike that appeared in the Wall Street Journal on March 24, 2015 (https://www.wsj.com/articles/for-money-managers-a-daily-search-for-signs-of-trouble-1427145320). Many thanks to my friend Jim Browning for that wonderful story that put my photo “above the fold.”

In my kitchen is a memento baseball. Visitors have seen it. The inscription reads, “It ain’t over till its over.” Yogi signed it. The punctuation error is there on the ball, and the words are written in his own personal hand.

Happy Anniversary! It ain’t over until it’s over.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


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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.




2Q2019 Review: US Equity ETF

Market volatility in Q2 of 2019 was driven by three distinct elements: (1) trade war and tariffs with China, on and off with Mexico, deferred temporarily with Europe, and festering with others; (2) economic indicators like details in the employment report pointing to a slowdown in growth; and (3) questions about what the Fed will do or not do, and when, including futures markets pricing in several cuts before year end.

Some sectors we hold in our US ETF portfolios did relatively well. The Defense sector and healthcare sector ETFs are among them.  We hold three healthcare ETFs.

The weakest sector we hold is energy, represented by domestic US companies in two ETF selections.  We may rebalance and add to that position at any time.

The gold miner ETF remains in our portfolio as a holding, as the gold price seems to be firming in response to trade-war effects and prospective Fed easing. Markets are pricing lower Fed policy rates, which implies markets are expecting a weakening US dollar. That trend is thought to be bullish for gold.

Trade-war effects have made forecasts difficult, as the trade and tariffs policy of the United States seems to fluctuate rapidly and inconsistently. For a portfolio manager, this adds to uncertainty premia.

As the second quarter of 2019 comes to a close, we continue to maintain a cash reserve in our US ETF portfolios and are not fully invested. Of course, that strategy could change at any time.

 

 

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio




Cumberland Advisors Week in Review (Jun 10, 2019 – Jun 14, 2019)

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 is here to review Cumberland Advisors’ thoughts on the markets this week. Today we touch on:

-Embracing the grind!
-At what levels will headlines become priced into the markets?
-How do we find a balance between optimism and pessimism?
-What are the latest model changes we’ve made for our U.S. and International strategies and current cash levels?
-What strong relative strength names have we returned to?
-What does it mean to “trade the market you have?”
-Where are we looking for opportunities?
-Exciting news for Cumberland!

Have a great weekend,
Matt McAleer

Watch below or at this link: https://youtu.be/YNtlSM3DJ4A

LATEST MARKET COMMENTARY

Turandot
David R. Kotok 06/13/2019
What Does “Data-Dependent” Mean?
Robert Eisenbeis, Ph.D. 06/12/2019
2% or 2% or -0.2%?
David R. Kotok 06/10/2019
Peter Navarro
David R. Kotok 06/07/2019
More on Tariffs
Robert Eisenbeis, Ph.D. 06/06/2019
Jingoism & Rare Earths
David R. Kotok 06/05/2019
EU Election: Negative But Could Have Been Worse
William Witherell, Ph.D. 06/03/2019
Fed and Climate Change
David R. Kotok 05/30/2019
May FOMC Minutes: Patience
Robert Eisenbeis, Ph.D. 05/21/2019
Memorial Day Reflections
David R. Kotok 05/27/2019
5G, Huawei, Trade War, Shooting War
David R. Kotok 05/23/2019
Finally, Some Positive Trade News
William Witherell, Ph.D. 05/21/2019
“Nations, Wars and Liberal Democracy” by George Friedman
George Friedman 05/20/2019

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On February 10, 2006, Luciano Pavarotti made his final public performance at the Opening Ceremony of the Torino 2006 Olympic Winter Games in his home country of Italy. Watch this interpretation of “Nessun Dorma” – from Giacomo Puccini’s opera Turandot. This performance compliments David Kotok’s commentary, also titled “Turandot.” Enjoy!

IN THE NEWS

The Market Expects the Fed to Do Its Duty
Quoted: David Kotok 06/14/2019
Bond Buyer – Municipal calendar grows to $7B as the summer reinvestment season arrives
Quoted: John R. Mousseau 05/20/2019
AdvisorHub – Large-Cap Growth Stocks Still Hold Luster
Quoted: David R. Kotok 05/31/2019
POLITICO – Trump’s two-front trade war triggers alarms
Quoted: David R. Kotok 05/31/2019
Governing Magazine – How Federal Tax Reform Has Impacted Real Estate
Quoted: John R. Mousseau 05/20/2019
Bloomberg – Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight
Quoted: David R. Kotok 05/18/2019
CNN Business – Why the US-China trade war won’t last
Quoted: David R. Kotok 05/14/2019
POLITICO – Markets freak (a little)
Quoted: David R. Kotok 05/08/2019
Bloomberg Radio – Bloomberg Daybreak Asia: Wear a Helmet When Doing Falconry With These Hawks (Radio)
Quoted: David R. Kotok 05/06/2019
Bloomberg Radio – The Fed Decides (Radio Podcast): Bob Eisenbeis on Bloomberg Markets
Quoted: Robert Eisenbeis, Ph.D. 05/02/2019

FEATURED INTERVIEWS
In this episode of The Acquirer’s Podcast, a chat with Perth Tolle, who is the Founder of Life + Liberty Indexes and the Freedom 100 Emerging Markets Index. She has some fun reflections on Camp Kotok.

Read or watch: https://www.equities.com/news/the-acquirer-s-podcast-perth-tolle-life-liberty-in-emerging-markets
WORTH MENTIONING…
The latest post at “THE DAILY EDGE” on June 14, 2019 by Denis Ouellet featured Robert Eisemnbeis, Ph.D. ” presenting the lay of the economic land.”

https://www.edgeandodds.com/

UPCOMING EVENTS
Our friends at The Global Interdependence Center (GIC) host conferences around the world with an emphasis on stimulating thoughtful, global dialogue on a wide range of issues that affect the international community. This June and July they’re featuring two of our folks from Cumberland Advisors.

On Monday, June 24, 2019, The Global Interdependence Center is returning to Chicago, IL for a conference with the Federal Reserve Bank of Chicago to discuss topics such as monetary policy, trade, manufacturing, productivity and labor force issues and to hear a keynote address on globalization by Catherine L. Mann, Ph.D., Global Chief Economist, Citi. John Mousseau will speak during the State of the State’s Fiscal Challenges panel session.

On Thursday, July 11, 2019, at Victor, ID, The Global Interdependence Center and the Bronze Buffalo Foundation gather economists, bankers, academics, and finance industry representatives just outside of Jackson Hole, Wyoming. The Eleventh Annual Rocky Mountain Economic Summit will bring together economists and entrepreneurs from around the country to discuss issues and opportunities relating to the global economy, featuring a talk with David R. Kotok and a keynote address delivered by Tom Barkin, the President and CEO of the Federal Reserve Bank of Richmond.

You’re invited to join John or David at one of the above events and cost and registration details can be found here: https://www.interdependence.org/events/browse/

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.

Thucydides-Trap

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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Cumberland Advisors
Weekly Update
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Turandot

Giacomo Puccini set China as the venue for his famous opera Turandot. Opera buffs will know it well. Anyone not familiar with this intriguing romantic opera is certainly invited to experience it.
Market Commentary - Cumberland Advisors - Market Commentary
Why do I start a commentary about China and the Trump Trade War by invoking an opera to serve as a metaphor? The reason is that there is a history lesson.
Puccini wrote the entire opera except for the final duet. He died on November 29, 1924, before completing the text. Franco Alfano was commissioned to complete the opera, but conductor Arturo Toscanini did not like the result. At the opera’s premiere on April 25, 1926, Toscanini stopped in the middle of the third act and announced to the audience, “Here the opera ends, because at this point the maestro died.” (Source: Richard Russell, executive director of Sarasota Opera)
The operatic drama underway features Trump and Xi. The setting is China and also Washington. Instead of the three riddles of Turandot, we have tweets back and forth between the US and in China. Sadly, though, the current version is not a comic opera. The closing duet is not yet written.
We may still end up with a settlement and the reduction of tariffs or their elimination. That is the benign outcome. Many market agents still hope for it.
To us, the evidence suggests the contrary. The final act of this performance may turn out as badly as Toscanini thought that Alfano’s ending did.
Look at the actions of China and not at the tweets in English in the US. Read the English translation of China’s draft “Measures for Data Security Management,” published May 24th. Here is an article about that document: https://www.scmp.com/tech/policy/article/3011655/chinas-cybersecurity-laws-may-be-used-block-us-tech-firms-national. The draft itself is available here in PDF form: https://www.insideprivacy.com/wp-content/uploads/sites/6/2019/05/Measures-for-Data-Security-Management_Bilingual-1.pdf.
To get a sense of what the stakes are for China and for its leader in particular, peruse this piece from Bloomberg News: “Xi Has Few Good Options After Trump’s Ultimatum on G-20 Meeting,” https://www.bloomberg.com/news/articles/2019-06-11/xi-has-few-good-options-after-trump-s-ultimatum-on-g-20-meeting.
And for deeper analysis, let’s turn to Geopolitical Futures. In a piece titled “The Fog of Trade War: Can China Outlast the US?”, GPF notes that China has been ramping up rhetoric that suggests “Beijing expects the trade war to devolve into a protracted, bloody slog.” However, GPF thinks conditions are still ripening for a partial deal on trade that ends tariffs; but “when it comes, it will hinge foremost on two of the trickiest geopolitical elements to forecast – the exact timing of the next U.S. recession and the mood of U.S. voters ahead of the next election.”
On balance, GPF concludes,
“Most likely, the White House will blink first, given the economic and political toll the tariffs will take on the United States. The U.S. tariffs alone won’t tip the economy into recession. If the current 25 percent duties on $250 billion in Chinese goods remain in place, most estimates expect an annual 0.3 percent-0.5 percent hit to gross domestic product and the loss of up to a million jobs….
“[T]he U.S. has been overdue for a downturn … and the tariffs are certainly capable of accelerating its arrival.”
As GPF notes, “None of this would matter if the tariffs were bearing fruit in the Trump administration’s two main goals: extracting major concessions from China and bringing jobs back to the U.S. But these don’t appear to be the case. Rather, while the costs of U.S. tariffs are increasing, the returns may be diminishing.”
We strongly recommend that readers study this entire excellent commentary from Geopolitical Futures, and we thank George and Meredith Friedman for permission to link to their website. Go to https://geopoliticalfutures.com/the-fog-of-trade-war-can-china-outlast-the-us/?utm_source=affiliate_cumber.com&utm_campaign=unvsl_affiliate_postid87866_cumber.com_2019-06-10&utm_medium=referral_unvsl.
At Cumberland, we believe that the US-China dispute is not a shorter-term nor a temporary item. We believe this is a long-term geopolitical conflict and a substantial one.
We still have a cash reserve in our US ETF portfolios.
David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio



What Does “Data-Dependent” Mean?

Markets and pundits were hyperventilating this past week over the prospect that the FOMC might cut the fed funds rate at its June or perhaps at its July meeting, driven by concerns that the economy might be slowing, as reflected in the disappointing employment report and the prospects for the imposition of import tariffs on Mexican goods. This view was fueled by statements by Chairman Powell and other FOMC participants that they stood ready to respond should there be negative fallout from the trade disputes.[1]

Federal Reserve - FOMC

The positive stock market reaction reflects a fundamental misunderstanding of what the FOMC’s policy approach is, what message the Fed officials were sending, and the circumstances the FOMC is facing.

One way to look at the issue is that the Fed has consistently indicated for more than a year that its rate decisions will be “data-dependent”. At the Chicago Fed’s recent conference on reassessment of the Committee’s policy framework, all that Chairman Powell and others who commented did was to spell out what kind of data might trigger a cut in rates, given the current economic and political environment. Specifically, with all the uncertainty about the tariff situation, the Fed would have to be blind, deaf, and dumb not to see and acknowledge the threat to the real economy that imposition of tariffs on Mexico would have on key industrial sectors, like autos. Such punitive tariffs might even trigger a recession. Of course, it should also be obvious that a 25-basis-point cut in rates would not offset the costs or impacts of the imposition of tariffs on Mexican imports, nor would it replace the falloff in Chinese soybean demand.

Fortunately, based on the President’s announcement Friday evening, the immediate Mexican tariff threat now seems to be off the table.[2] So what now are the key data elements that the Fed will be looking at for its upcoming meeting, and what might available data say about the need for a rate cut, keeping in mind that the FOMC staff had already included a near-term slowdown in the forecasts that were the basis of the “patience” policy stance coming out of the April-May meeting? Clearly, there are some plusses and minuses in the available data.

On the plus side, first-quarter real GDP growth was 3.1%, which is arguably above-trend growth. The unemployment rate is at a 50-year low at 3.6%, and labor markets are strong. New claims for unemployment insurance are running about 225K per week and are not only low by historical standards but also at all-time lows as a percentage of the labor force. Additionally, we continue to have more job vacancies than we have job seekers who are unemployed.  Despite the tight labor market the recently released Manpower survey showed that 27% of the survey respondent planned to add workers in the third quarter, a 13 year high.[3]  The most recent data on productivity, which has been mired in the doldrums for most of the recovery, may finally be showing signs of a rebound, increasing 3.4% in the first quarter of 2019 (compared with a year-over-year increase of 2.4%). Similarly, unit labor costs also decreased, reflecting the increase in productivity without labor cost pressures. Consumer debt increased in the latest report and signals increased spending on the part of consumers.[4] At the same time, small-business optimism is actually up, according to the most recent NFIB survey.[5]

On the negative side, the housing market has softened; manufacturing output has weakened; and durable goods orders are off as well.[6] But the number that has caught everyone’s attention is the weak CES jobs number, which came in at 75K.[7] Not only was the number about 100K below expectations, but the previous two months data were revised down – for March from 189K to 153K, and for April from 263K to 224K, making the totals about 75K less than previously reported. Job gains for 2019 have averaged 164K per month, compared with 223K per month for 2018. But one month’s data doesn’t necessarily signal a trend, and it is risky to focus on a given month’s data. In February only 56K jobs were created, but this low was followed by 153K and 224K the next two months. Similarly, in September 2017 the economy created only 18K jobs, but then it generated 260K jobs in October of that year, 220K in November, and 170–171K the next two months.[8]

What more data will the FOMC have as it contemplates policy for June? We know there will be a new set of SEP forecasts, so those should provide additional insights into how the Committee views the rest of 2019 and whether it thinks near-trend growth is possible. We also know that there is a new Beige Book, and it is useful to see how the information from the districts has or has not played into how the FOMC has characterized the economy recently.

The following table shows that in December 2018, when GDP growth was 2.2% on a year-over-year basis, half the districts reported moderate growth, which typically means about 2.2–2.4%, while all but two of the rest reported modest growth (something less than 2% – slightly less than moderate).[9] The FOMC, however, characterized growth as rising at a solid rate. District estimates for the three meetings in the first quarter of 2019 suggested that economic activity was not as robust, and the FOMC stated that economic activity had slowed somewhat in the first quarter of 2019 as compared with 2.2% growth in Q4 2018. We know, however, that real GDP growth in the first quarter turned out to be a full percentage point stronger, at 3.2%, than it was in Q4 2018. Looking forward to the June meeting, the districts are suggesting that activity was not even as strong as what they saw for Q4 2018. It appears that there may be a disconnect between what the districts are reporting and how the FOMC distills the information at the meeting, even when compared with the actual outcomes.

So, is there any other information in the form of incoming data, beyond what we presently have, that may serve to further inform policy makers at the upcoming meeting? In addition to the SEP forecasts and FOMC staff forecast, some relevant but probably not decisive data will be coming out between now and the meeting. These include data on PCE and CPI inflation; the weekly jobless numbers and job openings and turnover information (JOLTS); retail sales; and manufacturing information for May, including capacity utilization, industrial production, inventories, and housing data.[10] Interestingly, the available data on trade showed that in April the overall deficit decreased slightly to $50.8 billion as both exports and imports contracted; but interestingly, the trade deficit with China, which has been the focus of so much attention from the administration, actually increased 29.7% to $26.9 billion, more than half the country’s overall trade deficit for the month.

All this suggests that the FOMC will face a somewhat easier time at its June meeting than it would have faced had the trade issues with Mexico not been averted. What is left is a picture of an economy that is growing at trend and one that was already expected by the FOMC to slow somewhat from the 3.2% GDP number for the first quarter. This picture is in line with the forecast discussed in the last meeting minutes. With the labor market still exceedingly tight and financial conditions extremely accommodative, at least as suggested the Chicago Fed’s broad-based National Financial Conditions Index, it seems there is no pressing need for the FOMC to deviate at this time from the policy path the Committee laid out the last time its SEP forecasts were revealed. To move to cut rates now, given the present rather benign economic situation, risks sending an inadvertent message to markets that the Fed sees serious enough concerns ahead that it needs to act pre-emptively, when that may not be the case.

 

 

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


[2] Weekend analysis suggest that there may be less to the Mexican tariff announcement than what meets the eye.
[3] https://manpowergroup.us/meos/
[8] Source: FRB St Louis FRED



2% or 2% or -0.2%?

The bond market is currently a puzzle derived from an enigma influenced by an anomaly. Or is it?  Here are some bullets.

Market Commentary - Cumberland Advisors - Market Commentary

1. Riskless overnight US government cash equivalents yield more than 2- or 5- or 7- or 10-year maturity instruments of the same credit risk.  That means a market based forecast suggests that the average of all the daily rates for the next 2 or 5 or 7 or 10 years will be lower than the overnight rate is today. In other words the “term premium” is negative. The NY Fed says the 10 year term premium is lowest it’s been in over half a century.

2. The spread in yield between the euro-denominated higher-grade credit equivalent (Germany) is about 2.5% at these same maturities.  And the euro benchmark rate is negative.

3. One might surmise that the euro will appreciate against the US dollar at a rate of 2.5% a year for the next decade. Any other assumption requires hedging costs for any transaction or financing between the world’s first and second largest regional currency blocks.

4. Both currency blocks are involved in a multidimensional tariff and protectionist dispute with the world’s second largest economic sphere (by GDP, that’s China).

5. Many smaller economies are similarly engaged. Sorting all this out requires three- or maybe even four-dimensional perception.  Note those countries rates conform to their larger block neighbors. Swiss and Swedish rates are also negative.

6. In the US we can compare Treasury yields from June 2018 to June 2019. Three-month T-bill yields are almost a half point higher. One-year treasury yields are about the same. Ten-year treasury yields are over a half point lower. Hmmm?

7. Credit spreads tell a different story. Ten-year junk bonds versus Treasury have over a half point wider spread. High-grade bonds over Treasury yields is a little wider than a year ago but not as widened as junk.  The spreads of Bank shorter-term paper versus Treasury yields are nearly unchanged.

8. We surmise that credit risk in lower and middle quality is deteriorating but hasn’t reached the default headline stage yet. Does that stage lie ahead? Maybe, and more and more likely as trade war effects unfold and international volatility increases.  Will bank credit spreads widen against treasury yields?  That would be a serious warning sign of trouble ahead.

9. Is the flat or inverted Treasury curve forecasting a recession in the US? Maybe. It certainly suggests a weakening economic outlook.  The longer inversion continues the more recession risk rises.

10. Do negative bond rates in Europe distort US bond yields? Absolutely. How much? We all guess. At Cumberland we think the 10-year yield would be 50–75 basis points higher if European rates were normalized. But they’re not normalized now and are not likely to be normalized soon.

11. Is Cumberland buying 10-year US Treasury notes now that they are down to nearly 2%? No. Are we buying 10-year German notes below zero? No.

12. What are we doing at Cumberland in our total-return high-grade bond accounts?  We are respecting the component parts of term premium and expectations analysis. It is the real rate risk premium that is unusually low.  The other components are very close to where they were when the ten year treasury yield was 3%. For a discussion of term premia models see pages 79-90 in the BIS Quarterly Review, September 2018.  The researchers discuss both USD treasury yields and German euro yields.  When you examine page 85 you can see the graphics depicting the decomposition.

Please contact my colleague John Mousseau, his portfolio management team, or research team members to discuss details. Out of our 17 series 65-licensed IA folks, we’ll find an appropriate person to help those interested get a better handle on the complexities of the bond market. For Cumberland, the strategy today is a barbell with favoring weights in the front end and cushion bonds in the back end. We strongly favor high-grade credit.

We seek to preserve capital in these highly uncertain times. Of course, things can change quickly. Lastly, we avoid mechanical bond ladders. In today’s world they can be a trap.

 

 

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