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


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 – 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)


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 – 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.

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 – To Pass or Not to Pass? (Part 2)

In our previous discussion of the three options facing the FOMC – raise the funds-rate target, hold the rate steady, or cut the target rate – we argued that there were risks and potentially negative consequences associated with each.

Federal Reserve - FOMC - Uncertainty, Risk, & Three Options

The first option would shock markets and raise questions about the Committee’s rationale, regardless of what the communication might be, generating negative press for the FOMC. The second option would only trigger the speculation “if not now, when?” The third would risk an “I told you so” from the president – he had already begun questioning the FOMC’s competence following the release of the second-quarter GDP number on Friday, July 26. Moreover, that option would trigger additional demands from market participants for more and more cuts, regardless of the consequences.

We argued that the first estimate of second-quarter GDP would be a critical number, as it relates to the justification for the FOMC’s decision; so let us look at what is in the GDP report. The attached chart shows the breakdown of the contributions of the various key components behind the 2.1% growth that was reported.[1] There is something for FOMC participants to latch onto in order to support either their preference for a cut in rate or for no change.

As mentioned, GDP growth came in at 2.1%, which is exactly what the FOMC SEP projections had for all of 2019. That GDP number exceeded the most frequently mentioned expectation of 1.8%. Other positives were new home sales in June that were 42K above those in May, durable goods orders that were up 2% after being down 2.3% in May, and weekly jobless claims that were at 206K, down from 216K the previous week. Corporate earnings were largely positive as well.

But putting all these numbers aside, this quarter’s GDP number contained a couple of interesting twists. Only two categories accounted for the positive growth – consumer spending and government spending. The consumer number is especially interesting since it accounted for 2.9 percentage points of growth, while government spending added 0.9 percentage points. That consumer spending contribution is second only to that in the last quarter of 2017, when overall growth was 3.5%. Two main components account for most of the negative contribution to growth: Inventories subtracted 0.9 percentage points, and exports took off another 0.6 percentage points. Nonresidential fixed investment was virtually nonexistent and subtracted another 0.1 percentage point. Finally, there is a wild card in trying to figure out how much of an impact the problems with the Boeing Max 737 may have on both domestic production and international trade. We know that the Saudis have cancelled a 50-plane order, and there have been related cuts in parts and components as well. Mike Englund of Action Economics estimates that Boeing’s impact took about .2 percentage point off of GDP growth in the second quarter and without the Max problem export growth would have been -3.2 instead of -5.2% and equipment growth would have been 2.7% instead of only .7%.[2]

For those FOMC participants who have given great weight to the global slowdown, the large negative contribution of exports will be a point of focus, along with the anecdotal evidence that business investment is off because of uncertainty about a global slowdown and concerns about trade and trade negotiations. We note that these two factors were points of emphasis in Chairman Powell’s recent testimony on monetary policy. However, it is hard to fathom how a cut in rates would counter either of these concerns. So we are left with a dichotomy and dilemma for the FOMC. The domestic economy is on track and meeting forecasts. Moreover, PCE inflation came in at 2.3%, slightly above the FOMC’s target. On the other hand, the international side is not doing all that well and the trade issues look likely to persist for some while.

It is uncertain how the FOMC will come down on this mix of evidence, especially when it isn’t clear how a rate reduction at this time will address any of the key concerns. Regardless, the FOMC will be faced with a challenging communications effort to sell whatever it decides to do but will likely face political pushback: The president will claim vindication if a rate cut is forthcoming or continue questioning the FOMC’s competency if no rate change is forthcoming, and markets will cry out for even more cuts at subsequent meetings.

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)

[1] We need to keep in mind that sometimes the number can be revised significantly when the final trade numbers are received. There were also significant reductions in prior quarters’ numbers as well reducing 2018 growth to under 3%.
[2] See Mike Englund, Action Economics, “Impact of the 737 Max Grounding on GDP.”

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 – Draghi Signals “You Go First” to the Fed While Johnson Threatens

The European Central Bank (ECB) did not reduce key interest rates at its July meeting ending last week, contrary to the expectations of some observers. This decision leaves the US central bank, the Federal Reserve, to take the lead with a widely forecast rate cut at its meeting this week.

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

However, ECB president Mario Draghi did strongly suggest that new monetary stimulus is likely to be adopted at the September meeting of the ECB’s governing council. This stimulus will probably include both rate cuts and new quantitative easing measures. Notably, the governing council stated that it expected rates to remain at their present or lower levels at least through the next twelve months. Draghi indicated that the European economy does not appear to be headed for a recession, although the outlook for the trade-dependent manufacturing sector has become “worse and worse.” He emphasized his concerns about inflation expectations, which now are close to an all-time low. The ECB does not want to see inflation expectations become entrenched at current levels.

The expected monetary stimulus looks timely in view of the latest data on the state of the European economy. The Flash Eurozone PMI for July indicates a relapse in the economy over the course of the month, giving up the gains of May and June. A downturn in manufacturing is the culprit, with production experiencing the steepest fall since April 2013. European trade is being hit hard by the US-China trade dispute as exports to China have suffered. Brexit concerns, serious weakness in the auto sector, and slowing world trade are also factors. A resilient service sector and healthy private consumption facilitated by lower unemployment and higher wages continue to support the subdued forward momentum of the economy.

An important uncertainty affecting prospects for the European economy, cited by Draghi, is the outcome of the United Kingdom’s efforts to withdraw from membership in the European Union. Last week the new British prime minister chosen by the Conservative Party, Boris Johnson, made clear in his opening statements that the party has become a Brexit party, with no room for those who wish to remain in the EU. He also made clear that he intends to confront the EU and showed no willingness to compromise. He has stated to the EU officials that unless the EU is willing to compromise – in particular, to abolish the “backstop” which is the part of the deal agreed by the previous British government that is designed to prevent a hard border with Ireland – the UK will be leaving the EU on October 31 without a deal. The EU immediately responded that it will not reopen the withdrawal agreement, emphasizing that abolishing the backstop would be “impossible.”

By downplaying the likely harm to the UK economy that would follow, Johnson is seeking to demonstrate that he is very willing to see the United Kingdom go through a no-deal Brexit. He has filled his government with Brexit true believers and is starting a campaign directed at advising companies how to adjust to a no-deal Brexit. He has made clear that under a no-deal Brexit he will keep the 39 billion pounds that the previous government had agreed to pay the EU. Of course, all this may prove to be negotiation bluster by the populist leader, who is viewed by many as a British Trump; and a deal may eventually be struck. But Johnson does seem to be painting himself and Britain into a corner. He still faces the problem that Parliament is strongly against a no-deal Brexit, and the government has a very thin majority. While a no-deal exit is looking increasingly likely, an early election, possibly before October 31, is also possible. The Liberal Democrats clearly support remaining in the EU, and the Labour party appears to be moving in that direction.

Despite Johnson’s assurances to the contrary, a no-deal exit would be, in the words of the IMF, one of the greatest threats to the world economy, along with further US-China tariffs and US car tariffs. These threats, should any of them occur, would “… sap confidence, weaken investment, dislocate local supply chains and severely slow global growth.” There would also be a risk of “financial vulnerabilities.”

The UK economy is not in good shape to deal with the likely shock. In June, the UK manufacturing PMI was at a 76-month low. Business optimism fell to its third-lowest level in the series history, weighted heavily by Brexit-related uncertainty and disruption. Capital spending plans are on hold because of Brexit uncertainty. The critical financial services sector is already losing jobs. Even if business is helped by increased government stimulus to offset somewhat the impact of a no-deal Brexit, the UK would likely suffer long-term damage to its reputation and security. And it would still have to negotiate a trade agreement with its largest trading partner, the EU.

Sources: The Financial Times, the Wall Street Journal, HIS Markit, CNBC

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
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 Guest Commentary – The Quill, The Feather & DiMartino Booth on Housing

My friend and Camp Kotok fishing-person Danielle DiMartino Booth is CEO & Chief Strategist for Quill Intelligence, a research and analytics firm that is celebrating the one-year anniversary of launching its publication The Daily Feather and the four-year anniversary of The Weekly Quill.

Cumberland Advisors Market Commentary - The Tenthouse Suite - The American Housing Divide

Danielle has kindly allowed us to share with our readers an interesting, data-rich piece she recently penned on crucial issues in the US housing market. Titled “The Tenthouse Suite: The American Housing Divide,” it takes an incisive look at the problems young adults and other typically lower-income folks face in buying or renting homes today (link below).

But first, let me tell you a bit more about Danielle.

With Quill Intelligence (QI), Danielle set out to create a “research revolution,” redefining how market intelligence is conceived and delivered, with the goal of not only guiding portfolio managers but also promoting financial literacy. To build QI, she brought together a core team of investing veterans to analyze trends and provide critical analysis on what is driving markets, both in the US and globally.

Commentary and data from The Daily Feather have appeared in many other financial sources, such as Bloomberg, CNBC, Fox Business, Institutional Investor, Yahoo Finance, The Wall Street Journal, MarketWatch, Seeking Alpha, TD Ameritrade, and TheStreet.com.

Danielle is the author of FED UP: An Insider’s Take on Why the Federal Reserve is Bad for America (https://quillintelligence.us14.list-manage.com/track/click?u=a93505e1ffc51c4d9790b4c97&id=dcbc376f33&e=93c07ca37d). She is also a full-time columnist for Bloomberg View, a business speaker, and a commentator frequently featured on Bloomberg, CNBC, Fox News, Fox Business News, BNN Bloomberg, Yahoo Finance, and other major media outlets.

Prior to Quill, Danielle spent nine years at the Federal Reserve Bank of Dallas, where she served as advisor to President Richard Fisher throughout the financial crisis and until his retirement in March 2015. Her work at the Fed focused on financial stability and the efficacy of unconventional monetary policy.

Danielle began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette, where she earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in finance and international business from the University of Texas at Austin and an MS in journalism from Columbia University.

Now, here’s Danielle DiMartino Booth on US housing: “The Tenthouse Suite: The American Housing Divide” (text link: https://www.cumber.com/pdf/The-Tenthouse-Suite-by-Danielle-DiMartino-Booth.pdf).

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


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

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 – The People Have Spoken

There comes a breaking point for everything, a moment, an “Arab spring,” when people governed by the callous and corrupt stand up and say enough. For the citizens of Puerto Rico that moment came after the indictment of two former island officials on corruption charges and the release of a private group chat between Governor Ricardo Rosselló and other officials in which their comments were petty, callous, malicious, distasteful, and possibly criminal.

Market Commentary Puerto Rico

Now clearly, corruption isn’t anything new for Puerto Rico. Decades of corruption contributed to the Commonwealth’s record-setting bankruptcy. But in what may be a sign of the times, with sensitivities running high, the comments in those exchanges clearly crossed a line for many and showed a degree of contempt that was inexcusable. Throw in a decades-long recession, control of the Commonwealth government by a federal oversight board, austerity measures (never popular), and continued rebuilding efforts years after a disastrous hurricane season; and it is easy to see how frustrations rose to a boiling point. The island has since bled officials who participated in that group chat, with a number of high-profile resignations.

In a historic moment for the people, protests and other forms of civil unrest have successfully forced the resignation of Governor Rosselló. The people made their voices heard, and the governor was left with few options. I applaud my fellow citizens in the Caribbean. The words we use should matter, in both our civil and political discourse. Governor Rosselló will remain until August 2, when Justice Secretary Wanda Vazquez will take over.

The resignations and chaos have increased political uncertainty and likely prolonged restructuring negotiations. The Federal Oversight and Management Board (FOMB) may have strengthened its position as well. Judge Laura Swain, who is overseeing the island’s bankruptcy proceedings, has imposed a 120-day pause of ongoing litigation to provide time to regain stability and work out a plan to address the suits, as they hinder any conclusion to the broader restructuring effort. The longer-term economic impacts from the unrest are as of yet unknown. An orderly process in filling vacant positions and getting back to the business at hand would minimize longer-term impacts.

In response to the political upheaval and mistrust of Puerto Rican officials, Congressman Sean Duffy, Congresswoman Jenniffer González-Colón, and Senator Rick Scott have asked the president to appoint a federal coordinator to help oversee the continued rebuilding efforts and speed the delivery of federal assistance. We support this move and welcome the transparency the position would bring. More importantly, though, we hope this may mean a brighter future for Puerto Rico. The government should exist to work for the people, not for elected officials or bureaucrats.

Shaun Burgess
Portfolio Manager & Fixed Income Analyst
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 – Libra and Other Cryptocurrencies

Congressional hearings this past week were the first of what are likely to be a number of investigations into Facebook’s proposed Libra cryptocurrency and associated Calibra wallet.

Cumberland Advisors Market Commentary - Libra & Other Cryptocurrencies

The initial reactions of legislators at the hearings ranged from a desire to support and encourage financial innovation to downright skepticism and hostility. Some of the questioners asked very pointed and perceptive questions, which Facebook’s David Marcus had difficulty addressing. One of the most telling revelations was that it was represented that Swiss regulatory authorities would provide oversight of Libra and Calibra, a spokesman for the principal Swiss agency that oversees data security said that it had not yet been contacted by Facebook representatives. That revelation was critical when it came to some congressional members’ willingness to accept Mr. Marcus’s representations as being credible.

Facebook has made a lot of claims of the potential benefits of the Libra innovation, but some were viewed by Congress as either questionable or highly optimistic. For example, Facebook claims that Libra and Calibra could potentially enable the 1.7 billion or so unbanked customers to have access to a payments system, but it isn’t clear how that might come about. It was pointed out in the hearings that about half the number of the world’s unbanked households are in only seven countries (Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan).[1] None of these countries are represented at this time in the consortium behind Libra, nor are any of those countries’ currencies included in the reserve fund designed to back the value of Libra. China, which is home to about 13% of the world’s unbanked residents, has even prohibited the use of cryptocurrencies by its citizens.

As was pointed out at the hearing on Wednesday, July 17, one of the reasons that people are unbanked is that they have little or no cash. But to use Libra, a person must have a smartphone and be able to buy Libra with cash. This means that the underbanked in the above six countries and elsewhere will presumably have to buy Libra in using their own domestic currencies, whose value may be uncertain. Moreover, it isn’t clear that local businesses or residents would accept Libra in payment for goods or services – unbanked people are not engaged in international trade, and counting on remittances to generate volume is optimistic. In fact there is a startup and scale issue on a country by country basis  that hasn’t yet been addressed by Libra advocates. To this point, the Libra white paper is silent on how currency conversions would take place into and then out of Libra when the currency involved is not one in the reserve, or how the exchange rates would be determined.

Mr. Marcus stated that Libra will be backed by a basket of financial assets, predominantly denominated in dollars, euros, and Japanese yen, thus ensuring its stability; but there was no discussion of how funds paid into the Libra system that are not denominated in the reserve currencies will be handled and/or valued. Will redemptions take place at the rate initially paid or at the current market rate at the time of redemption? If the former, then users in countries with high inflation will quickly realize that they have experienced significant losses in real value and will back away.

As part of the House hearings, there was an excellent follow-up panel of experts – mainly academic lawyers – who raised a number of interesting issues concerning the Libra/Calibra proposal. First, it was argued that the reserve backup structure was subject to potential runs on the reserve assets that could threaten the fund’s stability and ability to convert Libra back into local currencies. Second, because the assets constituting the reserves were either government-guaranteed or federally insured, the Libra reserve was essentially free-riding on government guarantees should the stability of the reserve’s assets be threatened. Third, it was pointed out that the reserve was essentially an investment vehicle generating returns and profits that would be paid to initial investors in the Libra investment tokens, which are essentially securities. The investment vehicle would be a closed and centrally controlled vehicle owned by a group of large corporations and private entities. Fourth, because of the international nature of the proposed Libra structure, no one regulatory body could determine or regulate the rules of operation when it came to knowledge of customers, data privacy, or prudential operators. Furthermore, since other entities and exchanges could be layered on top of the Libra structure, the ability to monitor how those entities might impact customers, data privacy, or system vulnerabilities to hacking and cybersecurity risks could be compromised. In short, the systemic issues raised were analogous to the problems that the government faced when money-market mutual funds broke the buck during the Great Recession and the Federal Reserve intervened to provide emergency liquidity. Finally, at the hearings it was noted that the terms and conditions of the Libra operations are subject to change at any time.

One of the experts who testified, Meltem Demirors, went so far as to argue that Libra was not really a cryptocurrency at all, for several reasons. She noted that it was a closed and centralized system, not an open and decentralized system like Bitcoin, as one example. Libra was designed to be collateralized, unlike other cryptocurrencies that are uncollateralized assets. Investors in the Libra structure receive investment returns, unlike holders of other cryptocurrencies, which offer no such returns. The Libra system also has custodial risk, unlike Bitcoin, for example. Her criticisms, along with those of the other experts who were on the House panel, deserve careful consideration.

Another focus of the hearings concerned where US regulation and oversight would fit in. Since Libra and Calibra would be operated out of cryptocurrency-friendly Switzerland, it isn’t clear how US regulations would apply or how oversight would take place. The assertion (or hope) was that the business and wallets constructed upon Libra would be regulated in the countries in which they were domiciled, but that is just conjecture. The hearings clearly raised many issues and offered few answers.

For those who want to learn more about cryptocurrencies, how they have worked or not worked so far, how they have facilitated criminal activity, and where the key systemic risks are located, we highly recommend the recent statement put out by the Financial Economist Roundtable (FER), a group of nationally and internationally known finance professors and economists.[2] The FER met and considered the issues surrounding cryptocurrencies last year and published their findings, entitled “Crypto Assets Require Better Regulation,” and their report was published in the Financial Analyst Journal and can be accessed online.[3]

FER make several key points, some of which are summarized below, but we recommend the full report (only six pages), which contains a useful summary of the experience with cryptocurrencies to date and offers some good references for those who might want to dig deeper. Here are some of the key points in the report:

  1. While there may be some potential benefits from cryptocurrencies, and more specifically from the blockchain technology, there are significant risks and costs including use in illegal activities, the illusion of anonymity (the Libra/Calibra model is clearly not anonymous), vulnerability to hacking and theft, and price manipulation.
  2. Since cryptocurrency models are designed to work across national borders, no one regulator or set of national rules and regulations for privacy and consumer protections can work. The significance of this point seems to have been lost in the House and Senate hearings.
  3. All cryptocurrencies ultimately need exchanges to work efficiently. To date, exchanges are where the key cryptocurrency vulnerabilities have existed and where most of the hacking, fraud and losses have taken place. Again, the challenge requires an international solution, not merely individual-country regulation.
  4. Because of the risks, some countries, such as China, have actually banned cryptocurrencies.

FER made several policy recommendations designed to address some of the key concerns but at the same time to allow the experiment to continue.

  1. In the US, uncertainty exists as to whether cryptocurrencies are securities or commodities, what the tax status of returns earned in cryptocurrencies is, and these issues need to be addressed. The uncertain treatment of cryptocurrencies was highlighted in the hearings as one of the reasons Facebook chose to operate Libra out of Switzerland.
  2. The exchanges facilitating the conversion between cryptocurrencies and fiat currencies should employ cutting-edge security protections and should be subject to minimum capital requirements.
  3. Policies should ensure that crypto asset exchanges provide regulator tax reports to regulators and clients that describe all trading activity, like the reports required of US brokers and money market funds via IRS form 1099-B. Such reports would help law enforcement and discourage money laundering.

There is a lot to digest as the world explores the potential of blockchain technologies, and it is appropriate that the approach that Chairman Powell suggested during his testimony on monetary policy that Congress should pursue a cautious deliberation and not a sprint to implementation.

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


[1] https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf
[2] Dr. Eisenbeis is a member of the FER and participated in its deliberations on cryptocurrencies.

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 – “Send them back!”

Named for the last Hawaiian king (see https://en.wikipedia.org/wiki/Kal%C4%81kaua), Kalakaua Avenue is Waikiki’s answer to Worth Avenue or Rodeo Drive. When you turn the corner out of the Royal Hawaiian Center into the throngs walking on Kalakaua Ave., Planet Earth’s multicultural diversity lies before your eyes.

David R. Kotok

Hawaii is America’s newest and 50th state (see https://en.wikipedia.org/wiki/Hawaii_Admission_Act). It is a true American melting pot and a testament to why the outrageous chant “send them back” is an affront to everything our great nation stands for. One need only land at the airport in Honolulu and find, in the terminal, the story of a patriotic American named Dan Inouye (see https://en.wikipedia.org/wiki/Daniel_Inouye) to realize how gross an insult the president has injected into our national political life.

Our visit to furthermost western edge of the US is only a few weeks away from the trip to Maine and the region that contains the easternmost place in the US, West Quoddy Head. That landmark is six time zones from Pearl Harbor and is located about an hour’s drive from Leen’s Lodge. In that neck of the woods, too, the chant “send them back” is just as offensive.

Our encounters throughout the country in the last month took me to a dozen states where we met hundreds of citizens, young and old, of all political persuasions. Nowhere did we find “send them back” getting any support.

Many of my Republican friends simply say “I don’t agree.” They are privately distraught by this president’s behavior. Many Democrat friends say “racist” or “bigot.” They are also distraught. More than half of those I meet are simply fed up with the political divide and ugliness in our country. Many now ignore it. They tune it out. They’ve had enough of the Twitter wars.

Most financial and economics friends and colleagues are the same. We’re inundated by political trash. Added to it is Trump’s unrelenting attack on the central bank and specifically Chairman Powell. Presidents and Fed chairs rarely get along and have differed on many occasions, but Trump’s personal attack on Powell is without precedent.

Meanwhile markets ignore the political salvoes for the moment. They also ignore the shortages of labor to fill jobs. And they ignore questions in the credit sectors like commercial real estate vacancies or CLO risk or aircraft leasing.

From west to east we see signs of pressures building; we watch earnings carefully; and we worry about the deteriorating political landscape and its ugliness.

How this all tears at the national political fabric remains to be seen. But in our view the chant “send them back” resembles history from the 1930s, and it rekindles memories that run deep.

I expect the low-vol financial markets, which are intent on ignoring political forces, to get a wake-up call that may be unpleasant. “Send them back” doesn’t fly on Main Street. It won’t fly on Wall Street, either.

The great poem by Emma Lazarus inscribed on the Statue of Liberty doesn’t say “send them back.” From Hawaii to Maine, there is no broad support for slogans like that. At least that’s how it looks to this traveler.

The New Colossus

By Emma Lazarus

Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome; her mild eyes command
The air-bridged harbor that twin cities frame.
“Keep, ancient lands, your storied pomp!” cries she
With silent lips. “Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”

(Source: https://www.poetryfoundation.org/poems/46550/the-new-colossus . And here is a video reading of the poem: https://www.youtube.com/watch?v=N0B9CitsfU0 .)

And finally, here is a piece from the Brookings Institution that makes the case that, as its title says, “Racism is not a distraction; It’s policy” (https://www.brookings.edu/blog/the-avenue/2019/07/19/racism-is-not-a-distraction-its-policy/) . The author reminds us that “Racism should never be diminished as a distraction – history shows well that the strategic deployment of bigotry is a default practice used to undercut democracy.”

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.

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 – Clams Or Gold Responses

We received several comments from readers concerning some of the key points in our recent commentary “Clams or Gold.[1] Below is an abbreviated version of the questions, to which responses are then supplied.

Cumberland Advisors Market Commentary - Clams or Gold

Comment: You may have seriously misled readers because both the purity of the official gold bullion and measurement of ounces have remained constant, or at least they have been for the period of your nineteen-year study. As both the quantity and quality of gold have remained constant over these nineteen years, it is not that gold has inflated by nine percent, but those pesky fiat currencies, i.e. the USD in this case, have lost value by nine percent per year.

Reply: The issue here is not the measurement, quality, or purity of gold. The evidence suggests that other forces besides the value of the dollar have affected the price of gold more over time. Data show that the dollar has not inflated to the same degree that the price of gold has changed. Moreover, since we are looking at only the dollar price of gold, the movement in the price can’t be due to fiat currency value changes. Gold is scarce and people want it. (Note that 52% of all gold mined is used for jewelry.) Gold is priced in a world market, but we are not looking at the price of gold in other currencies, just in dollars. So the main point is that the price of gold is and has been more unstable than the value of the dollar. More detail to illustrate this point is contained below.

Comment: Consider that the cost of postage has increased by 9.2 percent over a 44-year period. Housing, oil, land, etc. also cost more. These are generally more difficult to quantify, but the energy in a barrel of oil today, i.e. BTUs, is probably the same as say in 1970 when oil was about $2 per barrel; now it is $60. Have oil, gold, or land, postage, etc. become unstable or are fiat currencies unstable? Perhaps I misunderstood the main point in the article, but my 10,000 fiat dollars that bought a brand-new car in 1989 will not even come close to buying a new car today. It is the fiat currency that has lost value, not the car, gold, land, haircut, etc.

Reply: What we need to look at here is the nominal value of certain goods compared to their real value and adjust for the fact that not only have prices changed over time but also our incomes have changed as has the quality of the goods we consume. In the case of oil, the main demand in the US is for gasoline, which cost about 36 cents per gallon in 1970, as compared with a national average price today of about $2.80. But clearly we cannot compare the nominal price of a gallon of gas in 1970 with the nominal price today, when we know that supplies (and incomes) then were not nearly what they are today. We all know about OPEC and how it has artificially manipulated oil prices over time. The point is that oil is a commodity, and both its real and nominal prices have changed due to shifts in supply and demand conditions. Oil’s nominal price has also been influenced by both politics and inflation (the main inflationary period in the US being in the 1970s).

The following chart shows the inflation-adjusted history of gasoline prices versus the nominal price in 2015 terms. You will notice that the real price of gasoline hit a low in 1998. Interestingly, in the 1930s, gas prices in inflation-adjusted terms were not much different from what they are now; but note that movement in inflation-adjusted prices doesn’t always mirror the upward movement in nominal prices that began in the ’70s.

Source: https://inflationdata.com/articles/inflation-adjusted-prices/inflation-adjusted-gasoline-prices/

On top of variations in barrel prices, US gasoline prices have been significantly impacted over time by the imposition of both state and federal taxes, which are also implicitly reflected in the above chart. The federal tax on gasoline has been flat since 1993 at 18.3 cents per gallon, but state and local gasoline taxes have increased steadily. (Pennsylvania now has the highest in the country at an average of 77.10 cents per gallon. The lowest is Alaska, with an average tax of 32.74 cents per gallon.[2])

One last point is that the demand for gasoline is a derived demand, in that we don’t want to keep gasoline in our garage; we demand it for travel. Therefore, we need to consider what the cost per mile is when we think about gasoline prices. We know that fuel economy has increased significantly, putting downward pressure on our travel costs. The average car in 1970 got 13.5 miles per gallon, whereas today the average is 23.6 miles per gallon. So we are getting much more work done with a barrel of oil today than we did in 1970.

Let us consider a different example by posing the question, what would a quality TV cost you today and what would it have cost you in 1954 in today’s dollars? In 2017 a 55-inch LG TV had a list price of $2300, or a price per square inch of $1.78. In 1954, the best TV you could get was a 21-inch Westinghouse for $495, which in today’s dollars is $11,875, or a price per square inch of $110.20. Put another way, if you were to use 1954 dollars to buy today’s LG TV, it would be substantially cheaper than the 21-inch TV. The Westinghouse cost $495, while today’s LG TV would cost $241. [3] Clearly there would be no demand for that Westinghouse TV today, and there are both quality and size differences that make true comparisons difficult. But the point is that goods change, quality increases, and real costs can decline. We could clearly pull out similar comparisons of today’s cars versus yesterdays.

This makes the gold comparison interesting because there are no quality issues associated with gold. As a reader pointed out, a bar produced today is virtually indistinguishable from one produced in 1920. But as I argued above, gold’s price has been much more variable and has increased much more than our rate of inflation. The chart below shows the nominal and inflation-adjusted price of gold in 2018 dollars.[4] The chart demonstrates that the real price of gold, when we net out the influence of inflation, is not only volatile but also that volatility is not due to variations in fiat currencies, including the US dollar. Note too that since the financial crisis there has been very little difference between the nominal and inflation-adjusted prices, suggesting that something besides inflation is driving the price of gold.

Comment: Economists should start talking about “Net Worth,” not GDP, and how much nations’ and individuals’ “Net Worth” are changing. The reason this world is in such an economic mess is that we only look at GDP, the credit side of the ledger.

Reply: GDP is not a nominal measure but a real measure of our economy’s output. As such it is a very relevant measure of what is being produced and can be compared over time to assess real growth, productivity, and how well the economy is doing. Moreover, it focuses on domestic production and not total production, which is captured in gross national product, GNP. If the main criterion for assessing our economy is how people’s net worth is increasing, then that is a whole different issue. The difference is wealth versus output. One is a stock, and the other is a flow. I might also add that wealth measures don’t help us understand employment or what segments are contributing to growth and employment.

Comment: I also question your argument about the unsustainability of gold mining. The price of gold can be inflated to match GDP, Net Worth, etc. A constant quantity of gold could also be inflated to mirror the world aggregate GDP, Net Worth, etc.

Reply: The statement about the unsustainability of gold mining is related to available information about the real current mining and resource costs involved in extracting an increasingly scarce commodity versus what miners can sell the gold for. The comment about sustainability reflects the calculation that the real costs of extraction will exceed the real value of the gold mined after adjusting for price changes.



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.