3Q2017 REVIEW: Tactical Trend ETF

Recognizing strengths and weaknesses among primary asset classes is the core goal of our Tactical Trend strategy. The strategy seeks to identify relative strength and trend strength in an attempt to allocate capital to the strongest asset classes while underweighting or eliminating exposure to the weaker asset classes. The asset classes analyzed and allocated to can include US equities, international equities, fixed income, commodities, and cash.

As in the previous four quarters, our primary exposure continues to be to US and international equities. Regardless of political and geopolitical global headlines, the world’s equity markets have remained serene, with a steady bid into any minor pullback. Commentators search for a reason for the sustained strength, but the markets are always a complex summation of multiple inputs. We find it impossible and foolish to try to pinpoint a single factor responsible for the consistent demand for equities. Our weekly research meetings at Cumberland focus on multiple markets and capital positioning. We attempt to complement global fundamental views with technical thoughts and ideas pertaining to risk vs. reward. Current trend, relative strength, and momentum readings have been solid, and our trading has been limited in Tactical Trend during Q3. The thinking is currently to buy weakness rather than sell strength. That strategy can and will change if some of our analytics start flashing caution, as they did briefly back in March. That pullback and each subsequent pullback was bought aggressively by the market. We will remain alert to indications of trend change and continue to monitor opportunities across multiple asset classes.

Matthew McAleer
Managing Director & 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.




Dogma is Dangerous: The Problem with Active vs. Passive Debating

Part of the allure of modern portfolio theory and the academic research that has become a staple of investment theory is its theoretical certainty. In very basic terms it states that through proper diversification and a long-term investment horizon – regardless of what the markets do – investors will, on the aggregate, benefit more and do so rather predictably. Index returns across all the various assets classes – which by definition are not perfectly correlated – will be the winning approach. Keep the fees very low, then buy, hold, and rebalance over long periods of time. Essentially, beta investing (getting the market returns) will beat alpha investing (trying to beat the market). Diversified allocation is king. “Everything is better with beta!” is the cheerleading chant from the indexed crowd.

By contrast, market timing and stock picking or sophisticated options and puts and shorts have great appeal for those who would make killer trades and try to multiply their capital quickly – with a lot of luck and maybe some skill. Market timing is what comes to mind when most people think of investing in the classic gun-slinging style of wild stocks and big living. The hot stock and the quick buck make for good cocktail party chatter, and the prominent practitioners – both famous and infamous – become the subjects of books and movies.

So, yes, this is the perennial active investing versus passive investing debate. Although the debate is useful, it is increasingly dogmatic and pitched as a zero sum game. But the assumption that investors must choose one investment philosophy to the exclusion of the other is flawed. It need not be a binary choice. Both options have merit depending on the need.

In the debate, however, the data in recent decades (maybe longer) seems to favor the modern portfolio theory and “allocation is king” investors. Of course there has to be price discovery (by those who trade and seek alpha), which results in winners and losers. However, the winners tend to be fewer than expected and seemingly random. For evidence, take a look at S&P Global with the SPIVA study and the Persistence Scorecards (see us.spindices.com/resource-center/thought-leadership/research/). Depending on the year, the percentage of active mutual funds trailing the market can be as high as 80% and even 90% in some market segments. And then, on top of that, the winners tend to be temporary. Here’s a quote from the Persistence Scorecard 2017 report:

“According to the S&P Persistence Scorecard, relatively few funds can consistently stay at the top. Out of 568 domestic equity funds that were in the top quartile as of March 2015, only 1.94% managed to stay in the top quartile at the end of March 2017. Furthermore, 0.92% of the large-cap funds, 2.38% of the mid-cap funds, and 2.26% of the small-cap funds remained in the top quartile.”

That record is actually quite damning for the active mutual fund industry, which continues to prominently schlep its wares at high costs with distribution muscle as if there is not a fundamental problem. Very poor hedge fund returns in recent years only highlight the point so prominently shown in the active mutual funds. Lots of selling, sizzle and sizable fees have consequences that are not consistently rewarding to investors.

Active investing will need to take a more humble and conservative approach in the future. The mutual funds can start by lowering fees across the board, which could help the performance of their funds right off the top. Then, in a moment of truth and aged reflection, half of the industry might realize that they are actually not providing much value and choose to retire. We all can agree that it was a nice idea back in the day, but the ebb of time flows onward. Active investing is not dead. The reports of its demise are premature even though the current data on the aggregate is unfavorable. A strong market correction or even a recession may change that.

There is also a problem with index investing, modern portfolio theory and its “allocation and diversification is everything” approach. The flaw is related to its strength and theoretical certainty over long periods of time. Yes, over the long-term horizon a diversified portfolio rebalanced in a disciplined way with low fees has the highest predictability of appropriate and reasonable returns. But, like a fanciful country song might state, “long-term is kind of like forever,” and nobody is immortal. As Keynes once noted, in the long-term we are all dead. For some investors in retirement, long-term investing even with some superior returns may not be a proper fit. The investor needs risk management that is not always properly accounted for with diversification only. Although the dogmatic crowd will argue otherwise, the long-term nature of index/allocation investing can actually be problematic. It is a strength and also a liability.

The key question, therefore, before investing should not be, “What is a person’s particular philosophy of investing?” Rather, the better question is, “What is the risk tolerance and timeframe for the money in question?” An institutional portfolio in a pension or an endowment or a perpetual trust may indeed have a long-term time horizon. However, funds that would be essential for living or for sustaining a purpose that cannot weather a large downturn in the market that lasts for a decade or more may need to be placed in a tactical investment. Risk mitigation and some market timing with a disciplined ability to include cash as an asset class become important elements of management. The long-term index approach will work in the short term until, of course, it doesn’t. At that point, it is too late to start thinking about short-term risk management, tactical adjustments, and capital preservation.

At Cumberland Advisors we have conservatively managed, active fixed-income (using individual bonds) and equity (using exchange-traded funds) portfolios. Our active investing with separately managed accounts works in different ways for different purposes and risk tolerances. It is a “building blocks” approach with many portfolio styles that can be used based on the investor’s need.

We also have a long-term, modern portfolio theory variant portfolio with a twist and a track record spanning more than a decade. Our Active Bonds/Passive Equities Portfolio style is appropriate for funds with a long-term time horizon. As stated in its title, the portfolio style uses actively managed fixed income, which is then coupled with passive equities in a 60% equity/40% fixed-income buy/hold/rebalance construction. Within the passive equities, we have a slight tilt to mid-cap stocks versus a straight index. For institutions and other investors who want conservative allocation and very low fees in a long-term, diversified portfolio; this investment style is a solid option with an established track record since 2003. For others who have a shorter time horizon, our more tactical portfolio styles in equity and fixed income may be best.

Michael McNiven, Ph.D.
Managing Director & 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.




Takeaways from NABE

The 59th annual meeting of the National Association of Business Economics took place earlier last week in Cleveland with a stellar lineup of presentations on the state of the US and world economies. Chair Yellen headlined the meeting with a tour de force discussion of why the Fed can’t figure out why inflation fails to respond to policy initiatives as it did in the past. Her discussion was academic– accompanied by detailed mathematical appendices – and thorough, covering all possible avenues being explored to try to understand inflation dynamics.

The discussion was candid and totally transparent and helps to put additional color on the wide range of policy rate assumptions we noted in our earlier commentary this week, all assumed to be largely consistent with the FOMC’s median forecasts for slow growth, a strong labor market, and inflation stubbornly below the FOMC’s target. Yellen delivered the kind of professional presentation to a knowledgeable audience that one could not envision a non-economist chair of the Fed presenting.

Martin Feldstein took the group on an impressive and informative deep dive into the prospects for corporate tax reform. He laid out the arguments for reform, including changes that would encourage repatriation of earnings abroad. But he did even more, because he not only examined the first-round effects of the various targets for reform but then carefully explored the second- and third-round knock-on effects. Briefly, his bottom line was cautiously optimistic, but he thought that the maximum that could be achieved this round was a reduction in the corporate tax rate to about 25%. His conclusion about feasibility, rooted in the likely difficulty of getting fiscal conservatives to significantly increase the deficit, is interesting given the ambitious initial proposal by the administration to cut the corporate rate even more.

But Chair Yellen’s and Professor Feldstein’s presentations were not the only reasons to attend the meetings(not to mention the reception held at the Rock and Roll Hall of Fame). Below are some highlights in no particular order.

(*) Economies around the world are doing about as well as the US is, but with some risks to the downside. Europe is actually doing a bit better than the US, finally. Unemployment continues to plague the Southern European countries, while Germany has about a 3.2% unemployment rate. The main risks to the downside are political and related to the rise of populism. Japan is still Japan, while many of the other Asian countries are doing quite well, especially Vietnam, for one. China is slowing, and forecasts show a slow, steady decline in its growth prospects through 2040. The big down side risk, and it is a major one, is China’s huge debt overhang, now amounting to 250% of GDP.

(*) Peter Jankowski from the Greater Houston Partnership reported on Hurricane Harvey’s impact on Houston, and his message was sobering but also encouraging. To be sure, property damage was severe, but not as severe as initially reported in the press. About 7% of the area’s residential housing was damaged, and slightly over 500K claims for FEMA assistance have been filed. Most of the oil refineries are back on line, and we have already seen gas prices start to recede. At the peak there were 35K evacuees in shelters, compared to a population of over 6 million. The Dallas Fed estimates that between 42K and 74K jobs will be reported lost in September, but employment will rebound in October. Nevertheless, there will be an impact on the jobs report. Approximately 8% of the area’s commercial properties were impacted, and 0.5% of the office buildings suffered damage. However, the area was overbuilt, with high vacancy rates, and reports are that landlords are making accommodative shorter-term leases available to affected businesses. Finally, about 300K vehicles were destroyed.

(*) We also learned more about the Fed’s exit program from Julie Remache of the Federal Reserve Bank of New York’s Open Market Desk. In addition to describing the program, Remache made it clear that the Desk’s initial intention – and presumably the Treasury’s – is to replace maturing securities in excess of the proposed monthly caps with bills, which would tend to concentrate any interest rate impacts of the policy on the short end of the curve.

(*) Finally, there was an interesting update on the energy situation. Here, the prospect was for lower prices for some time, with the US well on the road to energy independence. For the first time, OPEC now seems unable to control the world oil supply, and technology has imposed a cap on prices for the foreseeable future. To be sure, electric vehicles will have a longer-run significant potential impact on the retail gas market, but in the meantime natural gas will keep input prices and electricity costs low, freeing up consumer disposable income.

All in all, the meeting was chock-full of useful and relevant information for business economists and policy makers alike.

Robert Eisenbeis, Ph.D. 
Vice Chairman and Chief Monetary Economist
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.




Munis in Third Quarter 2017 – All About Storms

The real story of the muni bond market in the third quarter of 2017 was the impact of the three large named storms: Harvey, Irma, and Maria.

Harvey hit Texas on August 24th as a Category 4 hurricane. It was the first major hurricane to make landfall in the United States since Hurricane Wilma impacted Florida in 2005, and the first hurricane to make landfall in Texas since Hurricane Ike in 2008. Harvey caused massive flooding in the Houston area, with thousands of homes lost. Though damage estimates are still coming in, most are in the $100 billion-plus range, including large losses by uninsured homeowners. Part of the reaction to Harvey has been an upswing in oil prices as refinery operations in the Gulf area ground to a halt.

September 10th saw Hurricane Irma make landfall in the US Virgin Islands, causing catastrophic damage there and to the islands of St. Maarten and Barbuda. The storm then caused major damage in the Florida Keys and made landfall at Marco Island on the mainland of Florida. Irma’s predicted path had changed markedly in the days and even hours preceding landfall. Originally predicted to hit to the east coast of Florida, the 400-mile-wide storm veered toward the west coast of Florida at landfall but ultimately more or less plowed up through the middle of the state. Though there were widespread power disruptions and catastrophic damage in parts of the Keys, Florida was spared what could have been a much worse outcome if the direct hit had been on either coast. The total cost of Irma is estimated to be approximately $85 billion.

Bond market reactions to both Harvey and Irma were fairly small – perhaps a 10-basis-point uptick in yields, and that was mostly for the issues of local coastal jurisdictions as opposed to larger, more established issues.

On September 20th, Maria hit Puerto Rico head-on as a near-Category 5 hurricane. This was by far the worst of the three hurricanes, since it devastated the Commonwealth completely and produced an absolute human catastrophe. The insured damage estimates in Puerto Rico are $50–85 billion, and the uninsured losses are sure to be even more. Most of the island has been without power for a week and may be for months. Roads are impassable. Many residents are without shelter and food, and water supplies are meager at best. Landline phone service is nonexistent, and cell phone service is at about 20%. Rescue efforts are hampered by the damage to the airport, so that even people wanting to flee the devastation could not: The first few flights are only now making it in and out. Many trying to leave the island may face significant delays, perhaps for weeks. The rebuilding effort for Puerto Rico will be massive and will need federal help of a magnitude far greater than anything contemplated before the storm. We described our thoughts on a “Marshall Plan for the Caribbean” earlier this week. See http://cumber.com/a-marshall-plan-for-the-caribbean/. Congress cannot move fast enough here, and we would hope that the White House will take the lead.

Bond market reaction saw uninsured Puerto Rico bonds drop in price. Almost all have not been paying interest, so this is a price drop from the mid 50s to the low 50s. Insured Puerto Rico municipal bonds actually traded up in price (down in yield), with the market’s starting to discount federal help in rebuilding the infrastructure of the island.

Most times when disaster strikes we see immediate economic slowdowns in the affected areas and then a pickup in economic activity a few quarters later as the areas rebuild. The net effect on national GDP is fairly muted. But with the magnitude of these storms being so great and the storms coming within less than a month of each other, it remains to be seen what the overall economic effects will be. For example, between Harvey and Irma it is estimated that over one million cars will need to be replaced. That economic activity will be seen in the next few quarters as car manufacturers ramp up. The rebuilding that will go on – particularly in Puerto Rico – will have an impact on building supplies, construction equipment, skilled and unskilled labor, etc. Given the generally good state of the US economy and the relatively low unemployment rate, this activity could push up inflation from the low levels we have seen this year. The question will be whether the bond market views this economic pickup as temporary or more sustainable.

As for the rest of muni market, the quarter witnessed a drop of about 20 basis points in intermediate and longer tax-free yields from the end of the second quarter until Irma made landfall earlier this month. Since then yields have migrated upwards. This trend may be in anticipation of the higher expected level of economic activity that will follow these massive storms. My colleague Gabriel Hament and I wrote about possible bond market effects earlier this month. See http://cumber.com/us-hurricanes-and-the-bond-market/.

As we move into the fourth quarter, we will also be keeping an eye on the Federal Reserve, which is shaving its balance sheet by letting bonds mature and roll off without being replaced, even as it plans to continue incrementally raising short-term interest rates to match the pace of inflation.

Large infrastructure deals do not seem to have any problems being priced and bought by the market. (The Tappan Zee Bridge and La Guardia Airport in New York are just two examples.) Issuances by port authorities are also up substantially this year. So infrastructure is being financed even without any new mutuality from the white house.

As we reach the end of this quarter, our hearts and prayers are with all storm victims. And we hope that Congress does not drag its feet with aid, especially in the case of Puerto Rico. It is crucial that they move now.

John R. Mousseau, CFA
Executive Vice President & 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.




3Q2017 Review: Taxable Total Return

The third quarter of 2017 saw a strong equity market, while yields in the fixed-income market experienced continued volatility. The big picture for the Treasury market during the third quarter was that yields were little changed, with the 1-year Treasury yield increasing by 7.6 basis points and the 10-year and 30-year Treasury yields increasing by 0.5 and 2.7 basis points, respectively. The 10- and 30-year Treasuries did however set 2017 lows on 9/7/17, at 2.04% and 2.66%. These 2017 lows were spurred by lack of supply during the summer months, poor inflation numbers throughout the third quarter, and geopolitical risk surrounding North Korea and the “Rocket Man.” The following table shows the US Treasury actives curve, outlining the movement in yields across the Treasury market from 6/30/17 to 9/21/2017.


Source: Bloomberg

At the third-quarter FOMC meeting the Fed took a much anticipated break from raising short-term interest rates after it had increased rates a quarter point at each of the past three quarterly meetings. The FOMC’s “dot plot” indicated that they are likely to raise the short-term interest rate another quarter point at yearend and maybe twice next year. The Fed also stressed wanting to normalize its balance sheet and announced an October start to the unwinding process. They will do this in very small increments, resulting in a multi-year process. No one knows exactly how this will impact markets and the economy, but we expect to gain additional clarity as the process unfolds.

The FOMC’s statement following the meeting was mostly unchanged, other than adding a positive note on business investment, stating that “Growth in business investment has picked up in recent quarters.” Other comments in the statement acknowledged that job gains remain solid and that the inflation outlook remains unchanged. The statement also pointed out that the recent hurricanes will temporarily boost headline inflation, but they do not expect it to “materially alter the course of the national economy over the medium term.” You can read more about the historical impact of hurricanes on the bond market in the 9/8/17 commentary “http://www.cumber.com/us-hurricanes-and-the-bond-market/” co-authored by John Mousseau and Gabriel Hament.

During the third quarter of 2017 we looked to take advantage of the limited supply and the 2017 lows in Treasury yields by selling some of the long tax-free municipal bonds that we purchased at yields greater than 4%. The limited supply throughout the quarter along with retail demand for bonds provided an opportunity to feed the retail beast and take profits in several of our longer holdings. As yields have started to increase over the last couple of weeks and as summer has drawn to a close, it is our expectation that bond supply will pick up and some more attractive opportunities will be available.

As we enter the fourth quarter of 2017, Cumberland’s view is that rates will continue moving upward. We expect that the Fed will raise rates one more time this year, most likely in December and possibly twice next year. As the Fed initiates the unwinding of its balance sheet, it should become clear how markets will react moving forward. Our goal for the near term is to continue structuring portfolios defensively in the face of higher interest rates, while looking for opportunities on the long end of the curve as yields go higher. We will maintain a conservative approach to investing, with a focus on preservation of capital as long as we are faced with a rising-interest-rate environment.

DANIEL HIMELBERGER
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.




September’s FOMC Decision

As we at Cumberland Advisors expected, the FOMC left its policy rate unchanged for the moment and announced that it would begin the process of normalization of its balance sheet in October. They have a plan. It has been well-articulated. There were no surprises, and the Committee and Chair Yellen indicated that they did not anticipate any surprises. Consequently, the market’s reaction to this announcement was modestly positive. Finally, given the decision and the Committee’s Summary of Economic Projections (SEPO), the odds of a rate hike in December have increased.

Why do we think that the more likely rate hike is now in December rather than October? The answer is that the Committee is cautious, and with inflation still running persistently below target, it can afford to be patient.  At its October meeting the Committee will have only the first reading on Q3 GDP and will have some preliminary clues on the impacts of the hurricanes, plus a reading on September employment. That number will be speculative until the extent of the knock-on effects of the hurricanes can be determined and assessed. Recent presentations at the NABE annual meeting now suggest that the impacts will be less than initially forecast.  Finally, by December, there will be a refined estimate of Q3 GDP, three more labor market job reports, and a revised set of SEP forecasts to weigh against any new information on inflation.  By waiting the Committee will better be able to assess the accuracy of its forecasts for the near term.

The more interesting information from this last FOMC meeting is the insights we gleaned after the meeting, both from the SEP forecasts and from Chair Yellen’s press conference. The picture we get is s the FOMC’s view is that the economy is growing steadily and the labor market continues to improve, but the response of inflation has the Committee totally puzzled. Consider the Committee’s GDP forecasts. The highest median forecast is for 2.4% growth for 2017, followed by a gradual decline year by year to 1.8% in 202 Labor markets are projected to remain tight, with the median unemployment rate declining even more, from 4.3% to between 4.1% and 4.2%. Finally, the median PCE inflation measure is expected to move up to 1.9%, within striking distance of the Fed’s 2% target.

The problem is that GDP is weaker and labor markets are not significantly different in these new forecasts from what has happened in 2017. So where do the inflation pressures come from?  The question is especially interesting when we look at the distribution of the federal funds rate target that FOMC participants argue is most consistent with their forecasts. For example, the median outcomes are realized with a policy rate for 2018 ranging between 1.9 and 2.6%. (We are ignoring here the 1.1% number submitted by one participant.) The range of assumed target rates for fed funds in 2019 is between 2.4% and 3.4%, while median GDP growth is even lower, at 2%, from that projected for 2018. All the while, inflation is seen as pushing close to the Committee’s 2% objective. This view of inflation dynamics implicit in the SEP forecasts simply doesn’t comport with what has happened and implies that substantially different underlying forecast models and inflation dynamics are being utilized by FOMC participants.

Is there an alternative, understandable explanation for the inflation path we have seen? Simple Econ 101 supply and demand analysis may hold the answer. The picture we have right now is of a real economy in which GDP growth is slow both because of slow growth in the labor supply and low productivity. If, in such a world, aggregate demand is essentially in balance with production and there is no excess demand, then there can be no upward pressure on prices. People are simply not running around trying to spend but failing to find goods and services. If producers can’t raise higher prices in the face of non-existent excess demand pressures, then prices will not move up. Moreover, there will be no need to bid up wages. If this simple explanation works, then the FOMC’s clinging to a 2% inflation objective that is inconsistent with demand and production becomes a risky policy. This likely explains the wide range of policy rate assumptions FOMC participants are making and reflects the widely differing views within the FOMC as to what is appropriate policy going forward.

Robert Eisenbeis, Ph.D. 
Vice Chairman and Chief Monetary Economist
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.




A Tale of Two Countries

Currently visiting France, a country in which I lived for some 26 years, I am struck by the widespread optimism about the economic and political future of the nation. This upbeat sentiment contrasts sharply with French attitudes in recent decades and with the situation across the Channel in the United Kingdom as that country struggles to deal with the emerging implications of its fateful decision to withdraw from the European Union (Brexit).

French optimism appears to be based on the strength of the economic recovery that is underway, together with the election of a new reform-minded president, Emmanuel Macron, whose centrist government has a substantial majority that can support reform initiatives. France’s economy, the second largest in the Eurozone after Germany’s, is participating in a healthy economic expansion in the Eurozone.

France’s most recent leading indicators suggest some softening in the third quarter, perhaps due to uncertainty about the impact of the new government’s proposed reforms. Nevertheless, the outlook remains robust, with another strong round of job creation. Household spending has strengthened. Even more important, exports have rebounded with the upswing in global trade more than offsetting the effect of a strengthening currency. The annual GDP growth rate for this year looks likely to be 1.7%, up significantly from last year’s 1.1%. An even faster pace, 1.9%, is projected for next year as the recovery becomes more widespread and balanced.

The French people have elected by a wide margin a young, charismatic president whom the majority believe has a strong chance of strengthening both France and Europe. Macron’s election, followed by the success of his supporters in the subsequent parliamentary election, is seen as effectively ending the rise of populism in Europe. While Macron will likely find it difficult to obtain agreement on all of his ideas for reforming the European Union (EU), his efforts to convince Germany’s Chancellor Angela Merkel, who was re-elected on Sunday, September 24, to join his reform initiatives should bring about some positive results.

The strength of Macron’s parliamentary support implies that his domestic reforms have a good chance of being enacted. France is experiencing a period of work stoppages, demonstrations, and other annoyances fomented by some, but notably not by all, labor unions. While the hard-line communist CGT has been leading the protests, the largest trade union syndicate, CFDT, and Force Ouvriere have declined to participate. The number that turned out on a “Day of Strikes” fell well below the huge numbers that last year protested less ambitious labor market reforms. The general view appears to be that most of the domestic reform initiatives will proceed without significant alterations.

Indeed, on Friday Macron formally signed five decrees reforming France’s labor rules. These reforms will give firms more flexibility to negotiate working conditions. Employers will be able to reach deals directly with their employees. Small firms will be allowed to bypass union agreements and will be freed of many constraints. Redundancy rules will be less punitive. Government programs to subsidize jobs will shrink. These changes will add up to substantial labor market reform, changes that seemed impossible for past governments.

In the United Kingdom it is difficult to find evidence of the kind of optimism apparent in France. The economic picture is mixed. Uncertainty about Britain’s future relationship with the EU has not yet had the anticipated effect of curbing either domestic or inward foreign investment, yet polls of business attitudes suggest little support for the government’s Brexit strategy. Clearly, should the reality of Brexit in 18 months bring restricted immigration of needed workers and/or failure to reach an acceptable trade deal, business investment will be hurt. Purchasing Managers’ Index surveys for August showed that solid progress in new orders, output, and employment in the manufacturing sector were more than offset by slowdowns in services and construction. Overall economic expansion was the weakest in six months.

We anticipate that Brexit-related uncertainty will lead to slower growth in 2018, perhaps 1.5%, compared with this year’s projected 1.7% pace. Adverse developments in the negotiations could slow growth further, while clear progress towards a “soft Brexit” with substantial continued access to the single market would improve economic prospects.

Currently it is the political situation in Britain that is darkening the public’s mood. Prime Minister Theresa May’s weak government depends on support from several members of a small right-wing Northern Ireland party to maintain a majority. Within her Conservative Party and within her cabinet there is a sharp division on the government’s strategy for the Brexit negotiations with the EU.

Prime Minister May’s views have evolved. She formerly promised a “hard Brexit” with little scope for compromise with the EU, but her stance has become more moderate. She now is calling for a two-year transition period after March 2019, during which EU market access would continue. She promised to pay “a fair share” of the EU budget and added that the UK does not want to stand in the way of closer EU integration. At the same time, May has moved to take greater control of the negotiations, following an effort by her outspoken foreign minister, Boris Johnson, to push her in the opposite direction. The outcome for Britain remains highly uncertain.

Central bank policy outlooks also differ for France and the UK. President Draghi of the European Central Bank (ECB) has indicated that they are upbeat on the European economy but dissatisfied with the subdued pace of inflation. The strengthening of the euro is also likely a concern. Therefore, while some reduction in the ECB’s monetary stimulus through bond purchases is likely to begin soon, the process of “tapering” is expected to be gradual. No interest rate increases appear likely for some time, perhaps not until late 2019.

The Bank of England (BOE) sees the current healthy pace of growth reducing spare capacity and, in contrast to the situation in the Eurozone, sees inflationary pressures rising. It now looks likely that the BOE will raise interest rates as early as its November meeting. Together with the government’s restrictive fiscal policy, consumers hit by rising prices and low wage growth, and Brexit uncertainty, higher interest rates would add to our concerns about the UK’s economy next year.

We are not alone with such concerns. On Friday Moody’s downgraded the U.K. To an Aa2 rating from Aa1.  Moody’s gave as reasons their fears that Brexit could damage the country’s economic growth and concerns about the U.K.’s debt reduction plans.

Equity markets are reflecting the difference in the outlooks for the French and UK economies. The iShares MSCI France ETF, EWQ, has a September 21 year-to-date total return of 26.9%, while the iShares MSCI United Kingdom ETF, EWU, has gained 14.64%.

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

Sources: Financial Times, Goldman Sachs Economic Research, Oxford Economics, The Economist, iShares.com


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

Sign up for our FREE Cumberland Market Commentaries

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




Market Volatility ETF Portfolio 3Q 2017 Review: A Low-Volatility Market

As we march through one all-time high after another in the third quarter this year, our quantitative market volatility strategy has benefited significantly from being fully invested. The leveraged portfolio has done particularly well.

The volatility index, VIX, which is highly correlated (negatively) with the equity market, made a remarkable all-time intra-day low of 8.84 and hovered around the 9-handle for quite some time before it came back to the double-digit level.

Undeniably, the US large-cap equity market is in a low-volatility environment. The “fear gauge” has ranged above a 15-handle only a handful times in 2017, and these temporary blips merely took it into the vicinity of its 5-year historical average. However, the lack of volatility is not necessarily allowing investors to sleep soundly at night. Many worry that the current market environment spells complacency. Nevertheless, if we take a look at VIX history and concurrent S&P 500 movement, we do not observe a pattern of stocks’ falling after VIX bottoms. In fact, if we compare one-year returns using a randomly selected date to one-year returns after the VIX drops to a 52-week low, we find no statistical significance between the two returns. This is because the VIX does not possess forecasting power, according to our research. (Please see our prior market commentary for details: http://cumber.com/goodharts-law/.)

If the VIX cannot predict equity returns, how does it help investors? First, even though the index itself does not confer forecasting prowess, it is still, by its mathematical design, a reflection of traders’ views regarding the coming 30 days. Like CNN’s Fear & Greed Index, VIX is a contemporaneous tool that gauges market sentiment. More importantly, the VIX can be a natural hedge, owing to its negative correlation with the market. Although trading VIX may not be suitable for every investor, financial innovations available nowadays provide many channels for sophisticated market participants to utilize advanced trading vehicles at relatively low cost. For example, while one cannot buy the VIX index itself, volatility ETFs and ETNs are available. However, the tracking errors of those products may be high due to the nature of the VIX.

Overall, we believe that even though idiosyncratic events such as North Korea’s missile launches may temporarily drive up the VIX, the low-volatility environment will likely persist through the rest of the year, barring major disruptions.


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.




A Marshall Plan for the Caribbean

“George Catlett Marshall, Jr. (December 31, 1880 – October 16, 1959) was an American statesman and soldier. He was Chief of Staff of the United States Army under presidents Franklin D. Roosevelt and Harry S. Truman, and served as Secretary of State and Secretary of Defense under Truman.” Source: Wikipedia.

His brilliance on behalf of the United States was multi-dimensional, military and diplomatic. But he is most remembered for his initiative after World War II when the eponymous Marshall Plan helped rebuild defeated enemies. That remarkable initiative has created some of the strongest allies for the present day United States. It blunted the spread of communism during the Cold War era. It provided financing and assistance to destroyed countries and their citizens. It allowed them to become friendly and durable allies of the United States and not our enemies. For details see: https://en.wikipedia.org/wiki/Marshall_Plan.

So let’s take some editorial Sunday morning risk and propose the Tillerson Plan on behalf of the current Secretary of State. And let’s prospectively credit President Trump with supporting a Caribbean initiative that would become a modern day American hurricane response that honors the memory of George Marshall. Not only would this be a funded initiative for the American territories of the Virgin Islands and Puerto Rico but it would also extend aid and assistance to other Caribbean island nations. Of course, there could be collaborative efforts with other countries (like France or Netherlands) that have sovereign history with one island or another. And there are the independent Caribbean island nations to be included as well.

Imagine the huge positive response America would obtain with a US program to help the victims and their rebuilding effort. Imagine a modern day Marshall Plan for the Caribbean that includes the US citizens and also extends beyond American borders to our hemispheric Caribbean neighbors.

Funding requires Congress. My colleague John Mousseau envisions a special bonding authority for the American geography similar to those that were used in other circumstances. Funding sources for such an initiative can include a lateral segue of repatriated monies currently sitting abroad in special treasury bills under a tax code that has severe disincentives to their repatriation. In other words, the money is already there, sitting, waiting. And now we have a one-time, targeted, program opportunity.

All of that initiative requires a plan and a Trump Administration request for a one-time program. President Trump and Secretary of State Tillerson can do the asking. My best guess is they would get it through Congress since the politics incur little cost and reach into households of millions of Americans.

There would be conditions, of course. They can include a requirement that the money must be spent with American firms. That is now typical of foreign aid programs anyway.

And for the American geography a small percentage of the two trillion dollars currently now sitting abroad that awaits a repatriation tax law change could be used to fund this program. Instead of sitting in short term treasury bills and waiting for a law change, that same money could be immediately directed toward this initiative.

And there could be soft loan repayment structures. There can be rules and oversight. There are a lot of details to be determined once the concept is accepted.

The political benefits to our current president are huge even as the cynics would depict him negatively as opportunistic given our dysfunctional current political climate. But there are many who would applaud such an effort as a Trump equivalent of the Marshall plan.

Some personal notes are in order. In our Cumberland office are several folks whose families originate from Puerto Rico. We have personally heard and seen their familial stories of which there are many. The vastness of the damage allows us to project those stories to many thousands and maybe millions of others we do not know personally. We have other interactions to the Virgin Islands. And there are still others within our Cumberland business associations that encompass Caribbean nations and their consultants and advisors. So we believe that this full disclosure is necessary since some may accuse us of a conflict of interest by writing this commentary.

We wouldn’t write this if hurricane damage were not as deep as it is. Here is an example that my friend, and a serious economist, Joel Naroff noted in an email to me about Puerto Rico. Joel wrote: “according to reports, 1,360 of the island’s 1,600 cellphone towers were downed, and 85 percent of above-ground and underground phone and internet cables were knocked out. Most roads are covered with debris and few gas stations have power.”

Please take that single data fact and extend it broadly to all elements of a society with three and half million people (American citizens) who are living under a financially bankrupt government. That’s right, our fellow citizens in dire circumstances, living under a financially bankrupt government.

Joel asks if this Congress and President can be called into action and deliver. Others ask if it is recognized by Washington that these are American citizens as are those in the Florida Keys or Houston.

Our view is that the “America First” policy must include all of its citizens. That recognition must take place quickly in Washington.

But we would also recommend the initiative go beyond our territory and adopt the Marshall Plan heritage and legacy for the entire Caribbean. It seems to us that our country would benefit enormously from this approach.

George Marshall and Harry Truman saw devastation and acted. Can Rex Tillerson and Donald Trump see it as well? We hope so.

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.




3Q2017 REVIEW: MLP

We have started to see a bottoming process in the energy space begin to take hold. Limitations in crude oil production by OPEC and non-OPEC energy producers appear to have stabilized the supply to markets. In addition, demand is performing a bit better than forecast. As a result the US WTI (West Texas Intermediate) benchmark has recently stabilized in the neighborhood of $50 per barrel. This is despite the negative effects of recent hurricanes on refinery operations. A more stable environment for crude oil prices would be helpful for the energy complex, including master limited partnerships (MLPs). Partnerships have been creative in forming joint ventures and otherwise stabilizing their balance sheets. Valuations still appear attractive. The yield, at 7.65% (9/15/17)1, is appealing when compared to the 10-yr. US Treasury bond at 2.19% (9/15/17). The yield spread between the two, 547 basis points (5.47%), is still wider than the 15-year average spread of 3.57%. We expect distributions for most partnerships to continue to increase at single-digit rates. These factors have led us to become positive rather than neutral on MLPs.

Richard Daskin


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.