Cumberland Advisors Market Commentary – June Camp Kotok Report

Much of the discussion at Camp Kotok in June is private and respectful of the Chatham House Rule. Unlike the August hubbub, June is smaller and without press. There are some items of conversation we can make available to readers. Here is a list. My views about the Fed come last.

My fishing partner and June co-host, Chris Whalen, devoted one of his weekly commentaries to the gathering. Chris has deep knowledge about banks and credit and is deeply skilled in the mortgage and servicing arena. Here is his “View from the Lake”: https://www.theinstitutionalriskanalyst.com/single-post/2019/06/23/The-View-from-the-Lake .

Texas-to-Maine traveler Howard Getson uses AI intensively in financial-markets trading applications. He has developed an approach that holds promise for certain types of trading. We took a very deep dive while in Maine, but we’ll leave it up to Howard to describe his offering to qualified investors. Meanwhile, here is his weekly report, which features a discussion set at Leens Lodge: https://blog.capitalogix.com/public/2019/06/camp-kotok-economists-in-nature.html .

Brent Donnelly is a June regular. He usually brings one of his sons, who are very well-behaved young men and serious fishermen who enjoy outfishing their father. With an elder’s eye, I’ve watched them grow over a few years and smile each time I see one of them. They’re a little young to introduce to my granddaughters, but one never knows what the future will bring. Brent brought a copy of his new book, The Art of Currency Trading (https://smile.amazon.com/Art-Currency-Trading-Professionals-Exchange). Wiley published his book as part of their trading series. Brent has done a masterful job. I recommend it as an addition to the library of any serious investor who has exposure to the foreign exchange market. As you read Brent’s book, you may find him helping you understand some price changes taking place in your portfolio.

Michael Whalen was a real treat as an addition to the group. He is Chris’s brother and a skilled musician and two-time Emmy Award-winning composer and public entertainment personality. Whether you realize it or not, you have heard his music. He is also a teacher, author, and expert on digital copyrights. He pleasantly added an entire new dimension to the usual finance and economic chatter. Michael brought a preview gift of his new CD, a solo piano album titled Cupid Blindfolded. The lodge owners are fans of his music and played it at once. This was a real treat. Michael sent me this YouTube video about his latest creation: https://www.youtube.com/watch?v=MS4pcx1MWKA&feature=youtu.be . The fascinating video explores his creative process.

My personal thoughts about the Fed are shared here. Others’ views remain under the Chatham House Rule.

I believe the Fed needs to get the restructuring of the technical pieces in the front end of the yield curve done and with clarity. My view is that there are intraday liquidity pinches and anomalies that need fixing. Example: LOIS is broken because LIBOR is being replaced by SOFR, and that has wounded a key market-based indicator of credit risk and pressures. At Cumberland, we now use an internally constructed metaphor for LOIS. This LIBOR-SOFR is unfinished business, and the Fed is the responsible entity to complete it.

Next is IOER. It should be the floor in the corridor. First it was the ceiling. Now the Fed has it in the middle because they were trying to lower it in 5-basis-point increments. So the apparent plan was to raise the fed funds target 25 and raise IOER only 20. But the Fed never completed the step-by-step plan because they stopped raising rates earlier than they expected. The fix is simple: Lower IOER now. In July. Get it done. And clarify the REPO facility plan. Get it done. And restore the corridor to full functionality. Get it done. Market agents are guessing and waiting.

The balance sheet size reduction is nearly done. Why the Fed tried to raise rates and shrink the balance sheet simultaneously is still not explained. They started out doing one at a time and switched policy in midstream. But at least the shrinkage is nearly over. Finish it. Get it done. My forecast, for whatever it’s worth: It won’t be long before the balance sheet is growing again. Natural pressure from currency growth, Treasury cash balances, and reserves needed for intraday liquidity are going to require about $200 billion in balance sheet size enlargement each year and for a long time.

Since the June Camp Kotok gathering, the Trump administration has announced two nominees for the Fed board vacancies. We like both choices. Waller is skilled and seems to be against using negative interest rates as a policy tool. We like that. Negative rates are a deadly poison and a monetary trap unfolding in Europe. They have destroyed savers’ incomes and decimated velocity. And Christine Lagarde will inherit a pit of trouble, extrication from which will require all of her political and leadership skills.

Shelton has a pro-gold history and wants to re-examine the global monetary system. She will have a voice and gain attention.

For the Fed this debate will be a healthy one. Groupthink is a danger, as former Philadelphia Fed President Charles Plosser has warned.

Our Camp Kotok June gathering was a thoughtful one, and the musical addition made it even better. Fishing was good, as usual in this pristine environment, and the owner-hosts at Leen’s Lodge are welcoming hospitality professionals.

August Camp K is fully booked with a waiting list. Our interactions will result in many takeaways published by the various attendees. Jim Bianco has agreed to chair the Saturday night panel. The topic is MMT. The discussion will be public and not under the Chatham House Rule.

Should be fun.

BTW, you’re invited to a free event, “What is Next for the US Economy and Financial Markets?”, that I’ll be moderating on Tuesday, July 16th, in Keystone, Colorado. Details: https://www.interdependence.org/events/browse/what-is-next-for-us-economy-and-financial-markets/