Cumberland Advisors Market Commentary – The Bond Conundrum and How to Manage

The past couple of weeks have been breathtaking for bond investors and observers of the bond market. The yield on the 30-year Treasury bond is now at a record low – it dipped under 2% this week – and the 10-year Treasury is not far off its record low of 1.36% set in July 2016 – the yield now sits at 1.53%. With a little more than two weeks gone in August, we have seen the 10-year drop 47 basis points and the 30-year 53 basis points. This is more movement in two weeks than we sometimes see in six months.

 

There are many crosscurrents here. Most pundits are using the inversion of the yield curve as a forecast of a slowdown. But as we have noted in other pieces, economic slowdowns are far from synchronous with inversions. Growth continued for a year and a half after the yield curve inverted in 2006.

Looking at recent economic data, it’s pretty hard to find the slowdown:

– Retail sales advanced 0.7% month-over-month in July, versus an expectation of 0.3%.

– The Empire Manufacturing Index (New York survey of business conditions) advanced 4.8% versus an expectation of 2.0%.

– Core CPI is 2.2 % over the trailing 12-month level – right where it was at the end of December when the 10-year bond yield stood at 2.685% and the 30-year bond yield was 3.01%.

– The S&P 500 and the Dow Jones are still up double digits this year – even after this week’s turmoil.

– Second-quarter non-farm productivity is at 2.3% vs. a 1.4% expectation.

This does not look like an economy that is rolling over. Nor is it.

This is a bond market that has been buffeted by a number of factors that are not US-related.

Europe is mired in negative interest rates. The wisdom of having negative interest is strongly debated. One thing that is pretty clear to us is that negative rates have not helped the European banking system, and negative rates here do not help US banks, either – witness how poorly financials have done since the Federal Reserve changed its tune towards the end of last year.

The slowdown in China has pushed the yuan lower, and China’s growth rate has dropped. This has contributed to the rush into Treasuries. But we think there may be more playing out here, and it is symbolized by the protests in Hong Kong in recent weeks. Coming on top of the slowdown in Mainland China, the protests may herald the beginning of new freedom movements that the Chinese government will struggle to contend with.

How to manage bond assets
We continue to manage Cumberland total-return bond assets in a barbell method, accenting both shorter-term securities for liquidity and longer-term bonds to lock in yields, with what have been non-Treasury securities in the taxable world and longer tax-free bonds in munis. Indeed, with the fast rush down in Treasury yields, longer-dated munis, though at historical lows, offer value when you can get 3% higher grade in a world where long Treasuries are at 2%. We will take our chances with 160% yield ratios, knowing that defensiveness is built into the cheapness. The front end of the muni curve is VERY expensive relative to Treasuries, so even with a barbell and very low nominal yields, it’s been prudent to have exposure to the longer end of the market.The barbell strategy works less well when the Fed is at the end of a hiking cycle. We don’t believe the Fed is done yet: This is a pause in the Fed’s addressing the US economy. For all the change in talk from the Fed’s being on autopilot to now being data-dependent, the Fed has raised the fed funds target by 25 basis points in December and lowered it by 25 basis points last meeting; so from a fed funds target standpoint we are where we were last fall.

 

Equity markets are decently higher, and our economy continues to improve, yet the bond market has seen yields come down dramatically, in a manner that doesn’t square with US data but is more sympathetic towards the slower growth in Europe and China.

The trade war and concerns about slow growth notwithstanding, the US economy continues to do well. Our thoughts are that this race to the bottom in yields will slowly give way to a recognition that the US economy is on firm ground; the force of higher wages will push inflation higher; and the Fed will resume – albeit slowly – addressing the US economy. This is why Chairman Powell gave the markets a rate cut of only 25 bps last meeting though the markets were clamoring for 50.

Bond market yields here are high versus those in Europe, and that will keep a lid on things for a while. But the rush down has been overdone, in our opinion. My colleague David Kotok often likes to quote Herbert Stein, former chairman of the Council of Economic Advisers under Presidents Nixon and Ford. Stein’s commonsense “law” was that “If something cannot go on forever, it will stop.” We feel that’s true with long bond yields. The ride down in yields has helped portfolios. But backups can hurt, which is why we continue to get more defensive at the margin. The barbell is still in place.

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


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

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Cumberland Advisors Market Commentary – Cry for Argentina

Argentina’s primary election on Sunday, August 11, surprised everyone and shocked markets as the current president, Mauricio Macri, was defeated by 15.6 percentage points by the left-wing Peronist candidate, Alberto Fernandez. Macri now appears to have only a very slim chance to win the October 27 presidential election. His tough austerity measures, which were needed because of the serious state of the country’s economy and finances, have not been successful and have proved to be very unpopular.

Argentina

Markets reacted strongly early last week, with stocks, bonds, and the peso tumbling. At the end of the day on Monday, August 12, the main Argentina stock index, MERVAL, closed down 31% and Argentine sovereign bonds were down by 15 to 20 points. During the week Fitch cut the sovereign bond rating by three notches to CCC and S&P Global cut its rating on notch to B- with outlook negative At the end of the week the 10-year bond rate was 25.14 %, calculated from the yields of other available durations. One month ago the rate was 24.5%. The peso was down 15% after having initially swooned 30%. There has been some, though still modest, contagion spreading to other emerging-market sovereign credit markets. Argentina accounts for 5.5% of the Bloomberg Barclays EM US Dollar Sovereign Index.

Investors are clearly fearful of economic policies taking a left turn at a time when the economy is in recession: Growth declined 2.5% last year and 5.8% in the first quarter of 2019. Argentine inflation is among the world’s highest, registering 22% for the first half of the year.

Alberto Fernandez was declared a candidate in May by the former president, Cristina Fernandez de Kirchner, who declared herself as the candidate for vice-president. Kirchner’s period as leader was marked by heavy-handed government intervention in the economy and ill-conceived currency controls and government subsidies. Fernandez has not provided any details of his economic policies. He is strongly critical of Macri’s austerity policies, but he has indicated he will be more pragmatic and moderate than Kirchner was.

Macri, seeking to close the shortfall in his popularity, looks likely to move to the left, easing the austerity imposed as part of the country’s agreement last year with the International Monetary Fund for a $50 billion “preventive credit line.” He already has announced income tax cuts, increases in welfare subsides, a second increase this year in the minimum wage, and a 90-day freeze on gasoline prices. His economy minister Nicolas Dujovne has now resigned, saying the economic team needed “significant renewal”.

Investors’ concerns about these developments are well-founded. Argentina’s ability to meet its financing needs is at risk as investors appear increasingly hesitant to buy the nation’s bonds. Interest rates on seven-day notes were increased from 63% to 74% after the election. The country may need to ask the IMF to bring forward scheduled 2020 disbursements of its credit line.

The currency looks likely to remain under pressure. Macri’s presidency, which began in 2015, has already witnessed two other steep falls in the peso, one of 30% when Macri ended currency controls and one of 25% last year. These devaluations have serious effects on domestic businesses, for which most costs are dollar-based. And consumers are hit by a crippling increase in inflation.

The Global X MSCI Argentina ETF, ARGT, declined 24% on Monday August 12, and a further 4% on Tuesday. The markets for Argentine assets stabilized mid-week after speeches by both presidential candidates. ARGT ended down 24.4% for the week. These developments are a good example of how individual emerging-market economies can experience significant unanticipated risks. Emerging markets are currently experiencing high volatility and are under pressure from slowing global markets, trade wars, and a strengthening US dollar. At Cumberland Advisors we do not hold ARGT in our International or Global ETF Portfolios and have reduced our emerging-market holdings.

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

______________________________________________________
Sources: Financial Times, Barclay’s, BBC.com, CNBC, Yahoo Finance, Global Government Bonds

 


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 Week in Review (Aug 12, 2019 – Aug 16, 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

This week, we talk about:

-Whip in the Market
-Where the NASDAQ & DOW are
-Fixed Income Market
-Value in the Muni Market
-Where did we nibble?
-How about Gold?
-What do we think will happen next week?
-Our opinion on Yield Curve Experts
-Do we trade the economy? No.
-Thursday’s put/call ratio
-What we look for to make us move on our Quant Strategy

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-mcaleer-9415b16/

Watch this week’s video below or at this link: https://youtu.be/KEwEdA-mVsc


We’re fresh back this week from another “Camp Kotok,” an annual gathering at Leen’s Lodge in a remote part of Maine. The August event was a 50-person group that encompassed diverse political views, financial and economic specialties, and asset class focused from cannabis to currency trading, real estate to debt of all types, stock markets and ETFs, derivatives and futures, and more. Over $1 trillion in managed assets were represented as we gathered for each informal meal. No lecterns or PowerPoints. The China Panel and the MMT panel were on the record and now public domain; the press and public are free to use the video footage and quote the speakers. Other discussions were conducted under the Chatham House Rule. What follows belong is some of the content and discussions that resulted. More is forthcoming. Enjoy. -David



This 2019 Camp Kotok talk session features panelists Michael Drury (Chief Economist for McVean Trading & Investments, LLC.), Jonathan D. T. Ward (Founder of Atlas Organization), & Leland Miller (CEO China Beige Book), all offering their take on U.S.-China relations. The panel and audience Q&A are guided by moderator, Lisa McIntire Shaw.


Camp Kotok: Wall Street In The Woods by Dave Nadig

An excerpt…

Our Eyes Are Off The Ball
One of my parlor-tricks for large gatherings of smart people is to ask everyone the same question and then contemplate the spread of answers I get.

In the past, I’ve asked dumb things like “best first album” and smart things like “where’s oil going and why?” This year, my question was: “What’s one thing—a risk, a concern, a data point, a situation—that’s really important, that the rest of the econo-finance-sphere isn’t paying attention to?”

The answers here were dizzying. While there were a few somewhat predictable answers like “we’re in a corporate earnings recession and nobody’s talking about it,” there were also some big surprises for me, such as:

  • The entire global maritime fleet has to change fuel types in five months, and it’s going to cost a ton.
  • The New York PMI (producers manufacturing index) is flashing red-lights about the service-based economy.
  • Geopolitics is being swept under the rug, leaving us open to a “hot war” while we focus on all the economic wars.
  • The risk from Chinese corporates like Huawei is enormous.
  • The degradation of the National Weather Service is going to destroy U.S. agriculture.

The list of terrifying one-liners goes on and on.

Read more at www.etf.com


Camp Kotok MMT panel

Global debt expansion and central bank credibility is a major concern. I refer readers to the MMT panel for a clear, multidimensional discussion of MMT and the Fed’s dilemma: Camp Kotok MMT panel. My personal takeaway is that the Fed needs to step up its game with regard to its communications strategy. Most agreed that putting a name with each dot in the dot plot would be an easy improvement to make. If the Fed had a clear policy statement against negative interest rates, that assurance would help to reduce risk premia. The gathering views negative rates as a spreading financial malignancy. The varied forecasts about proliferating negative rates and their global effects are sobering.  Kotok note: adjusted for most recent inflation reports, the US treasury yield curve is already negative when computing real yields.



Mum’s the word. At least that’s the case here at QI through Sunday. We are traveling to Grand Lake Stream, Maine to attend Camp Kotok, a.k.a. The Shadow Federal Reserve Committee. The beauty of this fishing mecca on the eastern edge of Maine can be captured in one word: pristine. The hatched bald eagles reaching their beaks up to their mothers for that fresh catch of fish. The amber sunsets that demand the silence of those blessed to be in their presence. The tug on the line that stirs the hand-carved canoe on the glassy lake. And the reward of the small mouth bass you reel in, netted with pride by a fourth-generation fishing guide who imparts so much more than guidance through his wisdom and poise.

But there is a whole different sort of peace on offer as we gather at Leen’s Lodge. There is discretion. Camp Kotok is held under Chatham House Rules. As per tradition, “participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” We 50 economists and veterans of the financial markets speak freely knowing we are in a safe place to do so. As such, we feast on each other’s insights and views. It is indeed a rich experience.

We receive the Daily Feather and find it timely and informative. Their website describes it as “a forward-looking snapshot of the most pressing developments on the macroeconomic and investing fronts.” Read more or become a subscriber at: https://quillintelligence.com/



Enjoy this chat between Robert Eisenbeis, Ph. D., chief monetary economist at Cumberland Advisors, & Dave Nadig, managing director of ETF.com, as they discuss Facebook’s Libra and Cryptocurrency while taking a break from fishing at Grand Lake Stream, Maine. This is the first of many upcoming dispatches from Camp Kotok. We’re in a remote part of Maine where the weather and internet access both present problems from time to time but the experience, discussions, shared meals, knowledge exchanges, and enduring friendships make it all worthwhile!


What I Learned at Camp Kotok by John Mauldin

An excerpt…

Many participants had read my analysis of the potential for $45 trillion worth of US debt by the end of the 2020s. When I started talking about the potential for $20 trillion of additional quantitative easing, it was clear the question made some uncomfortable.

There was general agreement that neither political party can balance the budget. The latest “deal” between Trump and Congress raised spending $320 billion over the next two years. The previous “sequester” deal that at least tried to limit spending is out the window. With it will go any control on the spending process. Current deficit projections will seem mild compared to what we actually get.

Continue reading at www.mauldineconomics.com



In this 2019 Camp Kotok talk, Cumberland Advisors CEO John Mousseau & Jim Bianco, president and founder of Bianco Research LLC, discuss the Federal Reserve, Fed Independence Political Influence on the Fed, Negative Interest Rates, and more.


Brent-Donnelly’s-Notes-from-Camp-Kotok

An excerpt from Brent Donnelly

Last week I attended my sixth “Camp Kotok”near Princeton, Maine. The event is a gathering of economists, asset managers, traders, research heads and journalists that takes place each August deep in the Northeastern US woods, near the Canadian border. In pastyears the conversation and formal debate/ discussion centered around Fed policy, trade wars, the stock market, inflation and other short and medium-term economic factors. This year the conversation was more super macro and focused on three key long-term themes which discuss one by one. The three themes were:

1. A future where global rates remain permanently near zero
2. Modern Monetary Theory (MMT) and US fiscal strategy
3. A fundamental change in the US/China relationship

Read the full piece here: https://www.cumber.com/pdf/Brent-Donnelly%e2%80%99s-Notes-from-Camp-Kotok-2019.pdf


Are you concerned about the Trade War with China?

 

Lessons from Thucydides by David R. Kotok

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

This free monograph also has lessons for President Donald Trump’s trade policy. Can the United States avoid a Thucydides Trap with China & Xi Jinping?


Download a copy of this monograph in either PDF (free) or Kindle ($.99) format.


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




Cumberland Advisors Market Commentary – Report from Leen’s Lodge (Camp Kotok)

The 50-person gathering at Leen’s Lodge encompassed diverse political views, financial and economic specialties, and asset class focused from cannabis to currency trading, real estate to debt of all types, stock markets and ETFs, derivatives and futures, and more. Over $1 trillion in managed assets were represented as we gathered for each informal meal. No lectern, no PowerPoint. The China Panel and the MMT panel are public and in the social media domain and the press and public are free to use the video footage and quote the speakers. Other discussions were conducted under the Chatham House Rule.


There are some takeaways:

1. Regardless of the attendees’ political views, Peter Navarro’s advice to Trump is seen as a disaster. In a poll, 1 supported Navarro, 3 weren’t sure, and 36 disapproved. When asked more generally about Trump’s trade war policy, the group was divided, with about 3 opposed to Trump for each supporter.

2. The damage incurred by Navarro’s advice and Trump’s policy was cataloged in detail, and it is ugly. It is spreading and appearing in more and more evidence and anecdotes.

3. Border and immigration policies were discussed in detail and with data. The group’s outlook is bleak. Nearly all fault a dysfunctional Congress for its repeated failures. Here the group leaps over partisanship. Democrats and Republicans are guilty.

4. Global debt expansion and central bank credibility is a major concern. I refer readers to the MMT panel for a clear, multidimensional discussion of MMT and the Fed’s dilemma: Camp Kotok MMT panel. My personal takeaway is that the Fed needs to step up its game with regard to its communications strategy. Most agreed that putting a name with each dot in the dot plot would be an easy improvement to make. If the Fed had a clear policy statement against negative interest rates, that assurance would help to reduce risk premia. The gathering views negative rates as a spreading financial malignancy. The varied forecasts about proliferating negative rates and their global effects are sobering.  Kotok note: adjusted for most recent inflation reports, the US treasury yield curve is already negative when computing real yields.

5. The China panel packed an extraordinary amount of valuable information into a half hour and is well worth the time you’ll spend to view it: https://youtu.be/Sff0AGPrIJQ


 

This 2019 Camp Kotok talk session features panelists Michael Drury (Chief Economist for McVean Trading & Investments, LLC.), Jonathan D. T. Ward (Founder of Atlas Organization), & Leland Miller (CEO China Beige Book), all offering their take on U.S.-China relations. The panel and audience Q&A are guided by moderator, Lisa McIntire Shaw.

Beyond the direct China-US trade war, attendees discussed contagion risk, Hong Kong, Argentina, capital flight, and alternative choices for storing value in a world of discredited fiat money, among other issues. Most attendees expressed gratitude for an assembly that allowed for free and open exchanges under the Chatham House Rule.

Here are three questions for readers to consider:

1. How would you restructure your investment portfolio if you really believed that the global high-grade sovereign debt nominal yield would average 1% or lower for many years?  That implies real yields would be negative worldwide for a prolonged period.

2. How would you restructure your investment portfolio if you believed that high-grade federal, state, and local debt yield would also average 1% or lower for many years? This question implies that the entire yield curve (term structure) is under 1%.  What are implications for munis, mortgages, swaps, forwards, etc.

3. The third question involves geopolitical risk and personal safety. At Camp Kotok we had private conversation on this subject. The results are alarming as many of us have altered global travel plans. I’m one of those who has done so. So here’s the question. Think about the world that you see. Then make a list of every place you have visited during your lifetime. This takes a few days for older and well-traveled folks as memories are rekindled. Then look at the list and ask which of these destinations you would visit today and which not. Add this consideration: Which would you visit only with ample security and protection?

Lastly, Dave Nadig drafted an exquisite description of Camp Kotok and has given us permission to share it. Enjoy: https://www.etf.com/sections/blog/camp-kotok-wall-street-woods

We also have permission to share Brent Donnelly’s thoughts on Camp Kotok, 2019: Brent-Donnelly’s-Notes-from-Camp-Kotok-2019.pdf

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


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

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




Cumberland Advisors Market Commentary – Gorsuch & Fake News

At our Camp Kotok gathering in Maine, we often discussed truth and fact checking versus the spreading practice of political lies and fakery.  We will have more to say about the gathering. For now here is a case study about truth and lies.

Cumberland Advisors - Fake News

Shortly after he was appointed to the Supreme Court in April, 2017, Justice Neil Gorsuch announced that he would not be participating in the court’s “cert pool.” The pool is a labor-saving device by which justices share their law clerks in an effort to streamline decisions about which cases to hear. The pool has, however, been criticized – by former justice John Paul Stevens, among others – for reducing the number of cases the court takes up.

We applaud Justice Gorsuch for his action (he joins Justice Samuel Alito as the only justices who do not participate in the pool). We wish we could stop this missive right here.

But our purpose in writing today is actually to call attention to a rather devious story circulating on the internet that conflates Gorsuch’s move with a claim that the Supreme Court ruled on the teaching of Sharia law in US schools. The claim goes further, stating that Gorsuch, in his first decision on the court, not only cast the tie-breaking vote but also issued a statement about the decision.

There was no such decision. The claim is false. The Snopes website, on a page titled “Did the Supreme Court Side with Trump on Schools Teaching ‘Sharia Law’?,” establishes that the court has not considered the matter of Sharia law (source: https://www.snopes.com/fact-check/sharia-law-trump-schools-supreme-court/).

Thus, what began as a rather innocuous and complimentary story about Justice Gorsuch morphed into a blatant attempt to disseminate fake news. It is that fakery that has triggered this commentary.

In today’s world, people have considerable license to say what they please on the internet. Our First Amendment constitutional rights are very broad. But we should not forget that defense of our right to free speech includes the responsibility we each have to do independent research and to take care when dealing with social media and political websites of all types.

The fake story reached our office in the form of an email to me. Here is the explanation of how this devious behavior went viral: “The Supreme Court and Sharia law: How a fake-news story spreads,” https://www.politico.com/story/2018/05/14/fake-news-story-spreads-576752).

The originator of the fakery, Christopher Blair, has done a disservice to our nation and made a mockery of our Constitution, which protects us and him. In my opinion he is a scoundrel. He duped many who didn’t take the time to verify but instead forwarded his lies to others.

Here is the original text: We are reproducing it verbatim with permission from the author. If you saw it or if it was forwarded to you, please feel free to send my missive in reply. If you know the original source, you can decide for yourself about any action to take. Thank you for caring about the First Amendment and practicing vigilance to protect it.

__________

“THIS IS ONE OF THE MOST ENCOURAGING EVENTS YOU WILL NOT SEE, OR HEAR MUCH ABOUT IN PRINT OR ON TELEVISION…

“Neil Gorsuch has only been on the Supreme Court for a short while. Recently he ignited the fire of liberty and broke 40 years of precedent when he refused to join the SCOTUS ‘cert pool.’

“The cert pool was established in 1973 during the early days of the Burger Court, in order to efficiently review the near 8,000 petitions received each term. In practice, the petitions are apportioned among the Court’s law clerks, who then circulate a memo to the justices recommending a grant or denial. The obvious problem here is that this gives the power in these 8000 cases to the law clerks instead of the Justices. It also, in theory, allows 3rd parties to unfairly influence a case through the clerks.

“That is NOT how the Supreme Court was designed to operate. Neil Gorsuch just managed to set his foot down in the Supreme Court and say it is NOT okay to pass off judgments to the discretion of legal clerks. This is the kind of story everyone should be hearing or reading in the media, but obviously is not.

“Today the United States Supreme Court issued a direct and final blow to the Islamic Indoctrination of the young in this nation. The full panel of the United States Supreme Court which consists of 9 judges met to decide the fate of Islamic indoctrination in our American public schools. In a typical 5 X 4 decision, common sense won out, and we have sanity restored to our schools once again.

“The United States Supreme Court was able to hand out this decision banning Sharia Law and Islam from being taught in classrooms because of the tie-breaking vote of the newly appointed Supreme Court Justice Neil Gorsuch.

[Kotok note: The fake news practitioner has just told an outright lie.]

“Gorsuch went on to write about the decision: ‘The government certainly has no business being involved in religion, but this isn’t a government issue or a religious issue. This is about the judicial branch interpreting the laws as they apply to the teaching of religion. We shouldn’t be teaching any religions in the public schools of this country’

[Kotok note: The creator of fake news has had the temerity to put false words in the mouth of a Supreme Court justice. To couch that lie in religious terms is a further affront to the First Amendment.]

“Amen, Justice Gorsuch, Amen!

“Liberals are all about teaching Islam and Sharia Law but they have issues with ‘Under God’ in the pledge of allegiance and ‘In God We Trust’ on our currency.

[Kotok note: The fake news fabrication is now broadened into a liberal versus conservative religious rant.]

“This should have been a unanimous decision, not 5 to 4, but it seems the 4 liberal judges on the Supreme Court don’t care about the Constitution, or our values. Perhaps this is the start of restoring America to its founding glory.

“Thank GOD for our new Supreme Court Justice Neil Gorsuch — a great selection by President Trump.

“IF YOU WILL, PLEASE PASS THIS ENCOURAGING NEWS ALONG, AS I HAVE DONE”

__________

Dear readers. We try to fact-check everything we write about and offer citations. We avoid forwarded assertions like the deception above. And we scrupulously defend those magical 45 words of the First Amendment. Those words stand between us and tyranny.

Here is the text of the First Amendment, which Justice Gorsuch and his SCOTUS colleagues are sworn to preserve and defend.

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”

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

Above graphic derived from IFLA infographic based on FactCheck.org’s 2016 article “How to Spot Fake News”:  https://www.ifla.org/publications/node/11174


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 – Inflection Point?

I’ve known Tom Kean, former governor of New Jersey and co-chair of the 911 Commission, for 40 years, and served in several positions in his administration when he was governor. He represents the greatness of the Republican Party, which has produced folks like him and his father Bob Kean and others like Everett Dirksen or Margaret Chase Smith or Jacob Javits or Nelson Rockefeller. Tom’s book The Politics of Inclusion (https://www.amazon.com/Politics-Inclusion-Governor-Jersey-Thomas/dp/0029183413) is a timely reading for today.

Market Commentary - Cumberland Advisors - Inflection Point (David Kotok)

After the 9/11 Commission presented its final report, and over one of our occasional lunches, Tom Kean and I talked about the biggest terrorism risks and how to handle them. Tom was very clear. He said, “The lone wolf is our biggest risk.” He summarized a conclusion and I will paraphrase his words: Our Commission believed the other threats from external forces could be managed even though the cost might be high. But a lone wolf, acting with a distorted or misguided societal view, was the greatest danger. And the potential for that person to be manipulated by insidious forces in ways that the perpetrator did not comprehend only compounded the danger and made that individual a very dangerous risk to America.

We have just witnessed that threat play out again this weekend.

Authorities have now confirmed that 21-year-old Patrick Crusius, the shooter who opened fire at a Walmart in El Paso, killing 20 and injuring 27, was indeed the author of an anti-immigrant manifesto published online just minutes before the attack. They are now treating the El Paso shooting as an act of domestic terrorism (https://www.nytimes.com/2019/08/04/us/el-paso-shooting-updates.html).

In a rhetorical climate marked by intolerance, in which the president of the United States paints perceptions of groups such as non-European immigrants or journalists with a broadly negative and dehumanizing brush, the risks of stochastic terrorism are being realized. (Dictionary.com defines stochastic terrorism as “the public demonization of a person or group resulting in the incitement of a violent act,  which is statistically probable but whose specifics cannot be predicted.” See https://www.dictionary.com/browse/stochastic-terrorism.)

Tom Kean and his Commission colleagues hit the nail squarely on the head with regard to the dangers of the lone wolf. Washington political forces decided not to listen to them. Now we have the latest news and two more examples to underscore the argument.

As with anything else, there will be an ultimate “inflection point” with domestic terrorism. When that point is reached, things will change. Before that occurs, inertia and special interest politics are the combined obstacles. Only at the “breaking point” do things change, as Malcolm Gladwell has explored in his writings.

We had years of hijacked airplanes. It took the horrific events that unfolded on 9/11 to change the system with the introduction of TSA. 911 was the breaking point. We haven’t had a hijacking since. History is replete with examples of breaking points and the high cost required to alter a landscape once a society has reached an overwhelming consensus to change.

Are we there yet with mass shootings by lone wolves? How many more shootings, killings, and mass murders are needed until a national breaking point is reached and the Congress and the president change the rules? Or the voters throw the incumbents out and replace them with responsible leaders who will change the rules. Time will tell.

Here is a compilation of the buildup toward the breaking point.

2017:
In 2017, the US saw 382 mass shootings, including the deadliest mass shooting in US history, in Las Vegas, as lone shooter Stephen Paddock took 59 lives and injured 422 people, with hundreds more injured in the panic that ensued (https://time.com/4965022/deadliest-mass-shooting-us-history/).

2018:
323 mass shootings, with 387 killed and 1274 injured (https://en.wikipedia.org/wiki/List_of_mass_shootings_in_the_United_States_in_2018). Though the year was not unusual in terms of the number of mass shootings, more shootings occurred at schools than ever before: https://www.vox.com/2018/12/10/18134232/gun-violence-schools-mass-shootings.

2019:
251 mass shootings to date, with 281 fatalities and 1032 injuries (https://en.wikipedia.org/wiki/List_of_mass_shootings_in_the_United_States_in_2019). At the Gun Violence Archive (https://en.wikipedia.org/wiki/Gun_Violence_Archive) readers can view a list of 2019 mass shootings so far. That list is 11 pages long already and likely, sadly, to get longer: https://www.gunviolencearchive.org/reports/mass-shooting.

Here is a 37-year summary of mass shootings in the US, with a downloadable database: https://www.motherjones.com/politics/2012/12/mass-shootings-mother-jones-full-data/.

Inflection point?  Are we there yet?

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


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Cumberland Advisors Week in Review (July 29, 2019 – Aug 02, 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

This week, we talk about:
-What do we like
-What don’t we like
-Trump & Trade War effects
-Headline effects
-Options Traders and Speculation
-Allocations when S&P 500 & US 10 year are at par
-Bond Prices
-Depressed Coupons
-Tighter Yields
-Why we’re tight on Duration

Have a great weekend, send us your questions and comments, and thank you for joining us!

Watch below or at this link: https://youtu.be/o-SzWl98yT8

LATEST MARKET COMMENTARY

 

See more of the Week in Review here and feel free to subscribe and get updates in your inbox: https://mailchi.mp/cumber.com/cumberland-advisors-week-in-review-july-29-2019-aug-02-2019




Cumberland Advisors Guest Commentary –  Trump, Trade, Taxes, Troubles.

Guest Commentary by Bob Brusca
Bob Brusca, Chief Economist of Fact and Opinion Economics, sent a research note entitled “Why Trump is nagging Powell.” He included this chart. Note the dates.ISM ‘Trump’ rankings

The table above ranks the change in the ISM (Mfg.) and its components from their levels on the eve of Trump’s election to the current month. The ISM and other indicators initially jumped after Trump’s election, but now all that exuberance is gone. The ISM is the weakest it has been since November 2016. So are order backlogs, production, prices, new export orders, and import orders. There is a somewhat better ranking on inventories (not a good result, since inventories are still relatively high while output is on its lows). Nothing in that table will be liked by Trump or his economic team – his bragging rights are “slip-sliding away.”

We thank Bob Brusca for giving us permission to use his chart. We agree with his assessment.

Dear Readers, if you want to see the toll taken by the tariff war, here it is. Remember, no one wins in a trade war. Both China and the US are losing. Both are blaming the other side for the deterioration. Before this trade war started, the data in the chart pointed toward growth. Now it has reversed. There is little prospect for improvement unless and until there is a reversal in the trade war.

For months we have written about this issue. Trump’s supporters have hammered us and accused us of political bias. We want to remind them that we supported the original tax cuts, and we strongly supported the repatriation program that Trump originated and that he got passed in the first of Trump’s two congressional sessions. Now Trump is embroiled in various and sundry nastiness contests, and the upcoming election will mean a stalemate for legislative initiatives.

Meanwhile, Trump has squandered all the gains from the tax cut and repatriation and reversed the benefits by following the broad tariff approach advised by Peter Navarro. We have written and still believe that Navarro is sinking his president, and we watch as the defenders of Trump’s policy are digging in.

Markets are proving this assessment correct. And market agents see right through Trump’s blame-the-Fed and blame-Powell Twitter storm. Powell didn’t make the mess that is shown in that chart; Powell and the Fed have to navigate monetary policy because of it. Powell didn’t create the tariff wars. And Powell did not create the global economic weakness from trade war effects, nor did he promote the negative-interest-rate policy that now has $14 trillion in debt trading at an interest rate below zero.

I’m not defending the Fed’s communication. They have made a few gaffes, and they could be much clearer in their messaging. Trump’s blistering attacks on them doesn’t help anything.

Also, the Trump attacks, which call for lower interest rates on the capital-market side, ignore the reduction of interest earnings on household savings. Thirty million American households watch their interest earnings go down every time the Fed cuts rates. Actually, the number may be much larger than 30 million. The metrics used to estimate the effect of a lower interest rate on savings are debated. But no one debates that when you cut the earnings on savings you cause consumers to retrench out of fear and raise their savings to protect themselves. That is the effect.

What would the political fallout be if millions of Americans realized that the Trump call for lower Fed rates, which is directed at Powell, is also a Trump call for a lower amount of interest to be paid to every American with a CD or a savings account? Why hasn’t media commentary focused on the savings/earnings side? Why only the capital-market side?

Anyway, we’re in a summer of intensity. The Fed outlook is still unclear and uncertain. The Trump Trade War has just ratcheted up another notch. The economy is grinding along. The world looks beleaguered.

We have a cash reserve. Thanks to the Fed and to President Trump, who gutted the cut he badgered Congress to win, the earnings on that cash just declined a quarter point.

Camp Kotok is in Maine in a few days. The conversations will be fierce. We will report on them.

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


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Cumberland Advisors Market Commentary – To Pass or Not to Pass (Part 3)

The FOMC decided to throw a pass by cutting rates; but given the market’s response, it looks like they were tackled for a loss. In Woody Hayes’ parlance, the one positive of a forward pass turned into a negative.

Market Commentary - Robert-Eisenbeis - To Pass or Not to Pass (Part 3)

Powell attempted to offer three justifications for the policy move: to insure against downside risks, to counter global weakness and trade uncertainty, and to help push towards the Committee’s 2% inflation goal. These explanations appeared to be greeted with some skepticism by the media. But, more importantly, there were really two significant moments in the press conference, one of which has gotten little attention so far.

In response to a question, Powell first suggested that the way to think about the cut was as a mid-cycle adjustment. Markets initially interpreted this during the press conference as “one and done,” which was not what markets had hoped for, and the Dow dropped 478 points. But it recovered somewhat to close down 325 after Powell appeared to walk back the inference to suggest that future cuts would be dependent upon incoming data.

But the interesting takeaway from the press conference concerns the policy formulation process and related communications and may represent a significant change with important implications. It raises all sorts of questions about non-meeting meetings, speech coordination, etc. In particular Chairman Powell responded in a very telling way to a question of whether the FOMC felt market pressures for a rate cut, which I paraphrase below:

He first said, What we did was well-telegraphed.

He went on to add, What we did was consistent with what we had said we would do; our reasons were well-telegraphed; and we believe we will achieve our goals.

Finally, he indicated, We know that policy works through communications and actions consistent with those communications.

That interchange raises all sorts of questions about how closely markets will need to monitor and process speeches and other communications by FOMC participants. Chairman Powell strongly implied in his monetary-policy testimony before Congress that a rate cut was likely. President John Williams, for example, spoke before the blackout period leading up to the meeting and clearly implied that it would be better to take preventative measures than to wait for a disaster. These are but two examples of the “telegraphing” to which Chairman Powell referred. But were these communications coordinated? How could rate cuts be “well-telegraphed” if there had been no advance discussions and agreements? Are certain Board members and FOMC voting members discussing policy with each other before the meetings? All these questions not only deserve answers but also suggest that, going forward, Fed watching will be heightened and markets will respond to the possibility that they are getting advance information on policy moves. This is not the way the policy should be conducted.

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

Read Part 1 here: To Pass or Not to Pass? (Part 1)
Read Part 2 here: To Pass or Not to Pass? (Part 2)
Read Part 3 here: To Pass or Not to Pass? (Part 3)


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Cumberland Advisors Market Commentary – Markets During Apollo 11

This past week we celebrated the 50th anniversary of the Apollo 11 moon landing. Remarkably, only 1/3 of Americans today were alive when that happened.

Cumberland Advisors Market Commentary - Markets During Apollo 11

As a 12-year-old kid I was riveted by the space program and tried to digest the minutia of every flight. Like a lot of kids, we watched the moon landing in the late afternoon in the East on Sunday July 20th, and then our folks woke us up to watch Neil Armstrong set foot on the moon six and a half hours later. It was a remarkable culmination of technological excellence and perseverance that fulfilled President Kennedy’s promise that we would land a man on the moon. And for all Baby Boomers, it was another moment where everyone remembers where they were.

The financial markets looked a lot different back in 1969.

 

Inflation Inflation in mid-1969 was running about 5.5%. It had been around 4.35% the year before in mid-1968 and about 2.75% the year before that. The Vietnam War was still escalating and adding to inflation numbers. Inflation would turn down to 2.7% by mid-1972 – in part due to partial price controls imposed by the federal government – but this was short-lived, and inflation reignited, fueled by the Arab-Israeli war of 1973, which produced the first oil shock; and the inflation that followed climbed to over 12% by 1974. After a brief respite where inflation fell under President Ford (remember “Whip Inflation Now,” WIN buttons?), it resumed its advance again in the late ’70s, peaking at almost 15% before starting the decline to today’s relatively mundane 1.6%

Equity MarketsThe Dow Jones was at 846 at the time of the moon landing. Amazingly, for all the good will the moon landing generated, the Dow declined almost 5% from the time of the landing till the end of the month (buy the rumor, sell the news?). The moon landing came in the middle of a slide from a peak in the Dow of 995 in early 1966 to a bottom of 631 in May 1970. That represented a loss of 36.6% from the high. To put that in perspective, it would represent a loss of almost 10,000 points in today’s Dow Jones average. Clearly the market was reacting to the problems in Vietnam, the Cold War, and inflation. The market would rebound to a height of 1051 (a rise of 66%) in January 1973 as GNP and industrial production picked up markedly. And then there was a long slide to 577 in December 1974 – a drop of 45% from the high less than two years before. This fall correlated with the unfolding of the Watergate crisis that took down the Nixon administration, along with war in the Middle East and a pick-up in inflation. It was quite a time to start an investment firm, but that’s what David Kotok and his partner Shep Goldberg did, in June 1973.

Bond MarketsThe ten-year Treasury bond was yielding 6.65% in 1969 and had been yielding 5.50% the year before. It was in an upward trend that would peak at year end at 8% before declining to 5.5% in the spring of 1971 and then beginning the long climb that would peak in 1981 at almost 16%. To put this in perspective, if you had bought a ten-year Treasury bond at par in the middle of 1968, a year before the moon launch, a year and half later it was worth 85 cents on the dollar. One of the benefits – nominally – back then was that the higher coupons would offset some of the price damage. The more important thing is that the rise in bond yields during this period represented only part of the secular rise in interest rates that had been in effect since the end of World War II and that would end in 1981. We have been in a secular decline in interest rates since 1981, with the current low of 1.3% being reached in 2016 in the period immediately after the Brexit election decision. Are we now seeing another secular rise in yields? We won’t know until we have gone through an entire interest-rate cycle.

It’s very clear that the equity markets have reflected the country’s growth in population and technology and our general development as a society. It’s been 20+ years since we have been at the level of bond yields that were existing at the time of the moon landing. Now, NASA talks about going back to the moon in 2024 and to Mars beyond that. It’s remarkable that it has taken us 50 years to revisit the moon. That’s not to argue the merits of spending money on the space program, but the spirit that the country displayed during that historic period would be terrific to recapture.

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

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

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