John Mousseau on Risk in the Fixed Income Market (Podcast)

John Mousseau on Risk in the Fixed Income Market (Podcast)

Bloomberg Masters in Business Podcast – April 11, 2020

Bloomberg Opinion columnist Barry Ritholtz speaks with John R. Mousseau, who is president, chief executive officer and director of fixed income at Cumberland Advisors. Mousseau is also co-author of the book “Adventures in Muniland: A Guide to Municipal Bond Investing in the Post-Crisis Era.”

Running time 40:28

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Interview home at MIB website: https://www.bloomberg.com/news/audio/2020-04-11/john-mousseau-on-risk-in-the-fixed-income-market-podcast


TRANSCRIPT

RITHOLTZ: This week on the podcast I have a special guest. His name is John Mousseau, and he is President, CEO and Head of Fixed Income Trading at Cumberland Advisors, a firm that runs about $3.5 billion in mostly fixed income products. They do equity as well. I know Moose for a long time. He is David Kotok’s right-hand man, and I have been fishing with Moose up in Maine at the Shadow Federal Reserve event that takes place every summer for, gee, better part of a decade.

There aren’t many people who understands the internal plumbing and the mechanicals of fixed income the way Moose does. He really is incredibly knowledgeable and insightful. And I think if you are anything interested in fixed income, bonds, munis and how they actually are — are traded on Wall Street, you’re going to find this to be a fascinating conversation.

So with no further ado, my Masters in Business interview with John Mousseau.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My special guest this week is John Mousseau. He is the CEO and Director of Fixed Income at Cumberland Advisors, a bond shop that manages over $3.5 billion in assets. He is a Chartered Financial Analyst and has his masters in Economics from Brown.

John Mousseau, welcome to a shelter in place version of Masters in Business. I know John for a long time. We fish up in Maine every year in Camp Kotok. We’ll — we’ll come back to that a little later. Let’s talk a little bit about your career. Tell us about your first job on Wall Street.

JOHN MOUSSEAU, CEO AND DIRECTOR OF FIXED INCOME, CUMBERLAND ADVISORS: Hi, Barry. Thanks. I walked in off the streets of New York in the fall of 1980 and answered an ad from the New York Times for the Value Line Investment Survey. They gave me a quiz and hired me as an Assistant Securities Analyst.

RITHOLTZ: I remember getting the Value Line papers that you would put into a giant three-ring binder on updates on different companies and different sectors. That — that was a couple of years ago.

MOUSSEAU: You know, it ran that way for a long time before they got to the Internet age. And what you did as a securities analyst there is you wrote script to fit the model for the stocks. They had a relative value model that ranks stocks. But like I said, it was a great place to learn. Still have a lot of friends from there. I met Jeff Vinik there who was my deskmate early on, And, you know, the fact that the product is still out there today says a lot.

RITHOLTZ: And Vinik ended up at a little shop called Fidelity, if memory serves.

MOUSSEAU: It’s — yes, a little shop called Fidelity. And I can remember him saying to me we were there out over a couple of beers. He goes, “Moose (ph), if I ever hit it really big, I’m going to buy a hockey team,” and sure enough he did.

(LAUGHTER)

RITHOLTZ: For sure. So — so where did you go from Value Line? What was your next stop?

MOUSSEAU: From there I spent the next 12 years out of combined firms of E.F. Hutton and then Shearson after they took over Hutton, and did most of my work there in the beginning-ish for the Government Bond Department and the Municipal Department Bond Department and eventually ended up doing portfolio analysis at Hutton and ended up basically running our Portfolio Analysis Group right to 1993 where we analyzed municipal bond portfolios and suggested changes.

And in 1993 I went to Lord Abbett and became the Director of the Municipal Bond Management. That was a great spot; learned a lot from Bob Dow who ran the firm and ran the fixed income area there. And I was there until year 2000, and that’s the year I joined Cumberland Advisors.

RITHOLTZ: So you end up at Cumberland Advisors in the year 2000. Why did you gravitate more towards fixed income over equities?

MOUSSEAU: I really always enjoyed fixed income because of the way it tied together math and the idea that all bond prices, more or less, moved in the same direction, but none of them moved in the same velocity depending on maturities, et cetera. So it always had a lot more appeal to me.

And it’s — it’s funny because when I started at Value Line and you’re actually analyzing earnings of companies, I was excellent at predicting earnings, I still couldn’t figure out why stocks might hit their earnings, but go down or go up, and — and bonds always tied together much more rationally for me.

RITHOLTZ: So that leads to a question, I’ve heard over the years bonds called the “smart money,” why is that? Is it — is it that rationality that leads people to thinking bonds are — are a little less random or emotional than stocks are?

MOUSSEAU: I think the idea is with — particularly with municipal bonds, you know – it’s not my line, but I thought it was a great line – they don’t make you rich, but they keep you rich. And the idea of bond investing overtime and the compounding of interest, it’s — it’s terrific. And, you know, you go back and look back to the early 1980’s when interest rates are high. If you had bought something like zero coupon strips at 14 percent interest for 30 years, it’d be very hard to replicate that anywhere else.

RITHOLTZ: When I think of bonds, I think of three factors that go into the specific value of a bond. It’s the credit quality, the — the coupon or yield and the duration. Is it that simple or are bonds just a mathematical formula?

MOUSSEAU: No, there’s a lot more that goes into it. It’s not just credit quality, it’s relative credit quality. It’s not just duration, it’s a relative duration to the market. And — and it’s a structure of bonds, too, call protection or lack of call protection, a convexity comes in. I mean, that’s — that’s really — a lot of those judgments are what you would call total return bond management. And that’s where David Kotok is still the Chairman of Cumberland. And I agreed early on it was, you know, we — we — we saw the world the same in the world of bonds.

RITHOLTZ: Explain convexity of bonds positions to me.

MOUSSEAU: Sure. Convexity is — is really the — they call it the second derivative. So if you look at a bond and you can judge its duration or basically how much the price changes for a — a given change in yield, the convexity will tell you how fast that duration is changing. It’s like the — it’s like the equivalent of acceleration to speed.

RITHOLTZ: Huh, quite interesting. And — and for most of my career I’ve heard bonds described as the adult supervision in the room. The bond vigilantes were going to keep the Congress in check and make sure they didn’t deficit, spend too much. They were going to keep their eyes on inflation and fight that. Whatever happened to the so-called bond vigilantes?

MOUSSEAU: Well, that was a while ago. And — and, you know, if you go back one of bill Clinton’s favorite lines was – and I’m taking out the swear words, but that do you mean I — I really have to bow down to all the — the bond traders. And the answer back then from Alan Greenspan is yes, you do.

And they figured out a way back then to actually lower the government deficit and actually get it to a surplus. And along the way, interest rates came down which was really not a surprise. Now you’ve gone the other way and the deficit really haven’t mattered and you’re at all-time lows in yields. So to answer your question, a lot of that has been thrown out the door.

RITHOLTZ: His — his political adviser, James Carville, I believe, is the one who said, “When he comes back, he wants to be reincarnated as the bond market because everybody is terrified of it.”

MOUSSEAU: Right, maybe not this bond market, but yes.

RITHOLTZ: So, Moose (ph), let’s talk a little bit about how the bond market has changed over the past 30 years. What are some of the big differences between 2020 and 1980?

MOUSSEAU: I think there’s some differences and there’s some similarities, Barry. I think the biggest difference, of course, is electronic trading much more prevalent on the taxable side. On the municipal side, you actually just need to talk to dealers and underwriters, and that’s because of the diffused nature of the municipal bond market.

The municipal bond market is still much more of a people business. You have to kind of know where the bonds are, where the levels are, who’s offering what bonds.

On the corporate side, it is much more electronic-oriented, block trading-oriented. And — and that’s been — that’s been the biggest change, so a lot less people, clearly a lot less firms and bigger volume electronically.

RITHOLTZ: So — so let’s talk about what I think is the most fascinating difference between stocks and bonds. You know, the Wilshire 5000, the joke is it’s now about 3,000 stocks. Adding some of the over-the-counter and really small caps, maybe you have 4,000 stocks.

When we look at the world of bonds, there’s hundreds of thousands of individual bonds. It’s almost as if putting together a bond portfolio is bespoke. How infrequently do these bonds trade and how unique are each of these issues that are out there?

MOUSSEAU: Again, it — it differs. When you’re in the world of corporates, and mortgages and treasuries, it’s a fairly defined universe of — of bonds. And putting your portfolios together is probably a little easier than on the tax-free side where you probably have a million different CUSIPs out there, and that’s because of the nature of many bond issues that come to market where they have serial bonds and term bonds, and so just the amount of issues is almost overwhelming. So in the tax-free side, only a fraction of the available bonds that are out there actually trade every day.

RITHOLTZ: And explain what CUSIPs are for the audience who may not be …

MOUSSEAU: Sure.

RITHOLTZ: … on a bond desk.

MOUSSEAU: It’s a — it’s a uniform identification system so each bond has its own unique identifier, which is crucial to identify in the bond itself as well as processing the trade later on.

RITHOLTZ: And — and let’s talk a little bit about processing those trades. You know, early in my career and certainly early in your career, every brokerage firm had its own bond trading desk. Every bank, every insurer, trading was done constantly all over the place. Today it seems — and — and I rely on my friend, David Nadig who’s been pushing this argument for a long time.

Nadig says, “All that has been replaced with BlackRock and Vanguard as — as the new street bond desks.” Is he exaggerating or how true is that?

MOUSSEAU: Yeah, certainly, behemoth is out there. But look, you know, you can — you can look at that and say, “Does that work to your advantage or not?” As — as a smaller investor and advisor relative to those — those guys, a BlackRock is not going to care about a $25 million water bond from Eastern Ohio some school district. We care about $25 million water bond from Eastern Ohio because it’s meaningful to us. So to the extent that they’ve gotten too big and a lot of issues aren’t relevant to them, we can take advantage of that. So I would disagree with Dave a little bit.

RITHOLTZ: And at Cumberland, are you guys putting together bespoke bond portfolios? Are you buying bond mutual funds or bond ETFs? How do you deliver a fixed income mix to clients?

MOUSSEAU: No, we — we will use individual bonds as we put portfolios together. On our own — our thoughts have always been that the final product looks much better when you have individual bonds as opposed to owning mutual funds. And — and part of that reason is the ability to input certain yield levels and duration levels in the portfolios.

You know, the other part, too, just talking about mutual funds, in general, the difference between owning a portfolio of individual bonds and owning a mutual fund of bonds is the fact that if you want a mutual fund, you’re subservient to one price and one price only, and that’s the price that I find at the end of the day or if it’s an ETF, the price of that ETF at the end of the day.

If you own individual bonds, they can be spread out if you have some longer-term bonds and some shorter-term bonds. So if there’s a need for cash and maybe it’s not a particularly good bond market, you can find assets in the portfolio that have not been hurt price-wise and — and use them to your advantage. So I think individual bonds offers a much greater degree of flexibility.

RITHOLTZ: We’ve had some clients say to us, “I don’t want to own bond mutual funds because I’m concerned if during a bond selloff I’m subject to the whims of what my fellow mutual fund investors are doing, and that could drive the price below either fair value or net asset value.” How realistic of the threat is that to people who are bond mutual fund investors as opposed to buying individual bonds themselves?

MOUSSEAU: I think it’s a very good point because you don’t have control over that. And the route we just went through is a perfect example of that. You walk in the door March 9th and treasury prices were skyrocketing because of the Saudi selling of oil. That meant that a lot of the corporate and municipal bond dealers couldn’t hedge anything anymore with prices and treasuries doing what they’re doing. So what do they do? They’d back off their prices.

So then evaluation services don’t have many prices to — to put on that night, so they take prices down. So the poor guy whose only holdings is XYZ bond fund looks at his NAV the next day’s net asset value and it’s gone down. He says, “Maybe I should sell some,” so he sells some and the next day the mutual funds have to meet these redemptions by selling bonds into a market that’s already eroding.

So prices go down further. The next day, same investor looks, “Oh, my NAV went further, I better sell some more.” So now you’ve gotten yourself into a negative feedback loop of selling of mutual funds. And we saw that on a right absolutely gargantuan level in the middle of March.

RITHOLTZ: And had they wrote it out for a couple of weeks, the worst of it would have passed and we would have seen some sort of recovery in the – in the mutual fund and bond market. Is that a fair statement?

MOUSSEAU: That is a more than fair statement. It was not only a rebound, it was a rebound of historic proportions. So the back-off was also historic. It went essentially from two percent to four percent in about seven business days — six business days. And then you rebounded three-quarters of that in about three business days. I’ve been managing money for 36 years, I’ve never seen anything like it.

RITHOLTZ: So we have a mutual friend from Fidelity, Eric Golden who runs a quantitatively-driven fixed income portfolio. He said he saw a prices do things that the model say it just can’t happen. Your — your experience sounds like it was very similar.

MOUSSEAU: Very similar. And — and I can tell you just from — I mean, having good trades on, we saw bond prices down over 25 points and certainly some discounted bonds and lower coupons, so think about a bond that came in December at 100 cents on the dollar that was trading at $0.75 on the dollar in mid-March, and less than a week later it was being priced at par.

RITHOLTZ: So if you were nimble, there was …

MOUSSEAU: That was — that is (inaudible) …

RITHOLTZ: … there was upside to be had?

MOUSSEAU: Oh, sure, absolutely. You know, in a total return manager is going to use that type of a distress in the market to go and change the mix of his portfolios. And in our view, that sell-off that you saw in March was not credit-related, it was all liquidity related because of what was going on in the stock market. People wanted cash. It didn’t matter whether it was in a bond mutual fund or a — a — a REIT or — or anything else or selling gold and by the end of the week, they are also selling treasury bonds, so anything to get cash.

RITHOLTZ: The old line is in an emergency, you sell what you can, not what you want.

MOUSSEAU: And that’s true about the meltdown in mutual funds. You know, a mutual fund manager won’t sell what he’d like to sell, which might be a — I’m making it up — a hospital bond that you lean the wrong way and buying, it doesn’t have the greatest credit in the world. It’s exactly what you said, Barry, you sell what you can sell, which is usually a high-grade bond.

RITHOLTZ: So earlier we were discussing the dislocation in corporates and treasuries, let’s talk a little bit about the muni market from everything I heard and saw during the beginning volatility early in March. It looked like the muni bond market had just gone berserk, maybe even the most severe dislocation of any of the fixed income trading we’ve seen. Tell us what happened. And so far, have the markets recovered yet?

MOUSSEAU: Sure, Barry, I mean, it was certainly a — March was certainly historic volatility and historic loss, and almost historic rebounding. You know, I — I still I harken back to March 9th when treasury prices were spiking upward and yields are dropping, and that rendered most firms out there on Wall Street impotent to actually give you a bid on bonds because they couldn’t hedge anything. So prices were backed off.

And that combined with the stock market and it started to roll over partly because of the price of oil is dropping and there was concern on the economy and the coronavirus picking up. And you suddenly had a perfect storm of dropping equity prices, people looking for cash wherever it could be, and that involved the selling of bond funds and bond ETFs into a market that was overwhelmed. So when you think about bond yields moving up from two percent to four percent, that is a historic rise in a very short period of time, 200 basis points and, essentially, a doubling of yields.

And — and, like I said, most of that was almost all liquidity-related and — and not credit-related. And — and — and yet there are concerns out there about — of course, about municipalities and how they’re going to fare through this. Our viewpoint on that is that most really kind of high-quality general obligation and — and essential service bonds are going to be fine. You know, what you end up doing is you’re looking at the essentiality of the services, the prism of the virus and things look a little different if you’re talking about something like a — a rapid transit bond or an airport bond, et cetera. But that — that was not the cause of the sell-off in the mutual funds.

RITHOLTZ: So this wasn’t a systemic issue, this was just a massive amount of volume that overwhelmed the normal liquidity that exists in the bond market?

MOUSSEAU: That’s exactly right. And you hadn’t seen that before where the meltdown in the bond market was occurring alongside a meltdown in the stock market. The last time you really saw that was in 2008, and that was after Lehman failed. And that sell-off in municipal bond funds was credit-related because nobody knew whether anything was going to pay. In other words, when — when Lehman went under, it was like a 13th strike of a clock and people wondered, “Oh, does that mean my school district is not going to pay off its bonds or that the water authority won’t pay off its bonds?” It was really overdone, but — but that was the nature of that sell-off.

(COMMERCIAL BREAK)

RITHOLTZ: So let’s look at the current circumstances, which seem to be not comparable to anything else that’s come before, including ’08, ’09. Uncle Sam has shown an ability to keep running deficits for as long and as deeply as needs, but states and cities don’t have that luxury. And we know that these states and we know that these cities, especially areas like New York, New Jersey, Washington State, wherever the virus has — has hit pretty hard, we’re starting to see signs that’s happening in Florida, how are these states going to operate if they can’t run a deficit and have hundreds of millions or billions in shortfalls? Are these states potentially at risk for defaulting on whatever general obligation bonds they’ve issued?

MOUSSEAU: It’s a good question, Barry. And what you look at is really two-fold? One, almost all bond issuers have debt service reserve funds. Sometimes that can be a half-year, sometimes a year, it depends on the — depends on the issue.

Will we see credit downgrades? Absolutely, you’re seeing it now. Will you see invasion of debt service reserves? Sure, and you’re going to see thinner debt service coverage across the board. That’s a given.

We don’t think you’re going to see massive defaults, especially if you come out of this within the next month or two. So what it — what it is it’s a — it’s a torpedo to the side of the ship, but the ship is going to continue the sail. And then you start restoring debt service. We think that there is a lot of federal support for certainly some of the bigger agencies out there. Let’s take a very high profile one.

Look at the MTA in New York City, the subways. You can certainly think of, you know, MTA as a — as a poster child for transportation, and transportation is certainly a poster child for infrastructure. And I think that’s one thing that the administration is really keen on. So I — I see certainly a lot of support for that. I see a lot of state of New York support for that, so I — I don’t expect to see a default on that. It doesn’t stop bonds from trading cheaper, we’ve seen that for sure. And that’s — that includes airport bonds as well. You look at the hub airports out there, the federal government is not going to have those airports go into default because they are necessary for the restoration of the economy when we’re back at work in hopefully a month.

RITHOLTZ: We normally think of equity investors as the risk-takers who are more greatly compensated for assuming that risk than the traditional bond investor. But I have to ask given what you just said, what sort of compensation are risk-takers receiving in the fixed income market these days?

MOUSSEAU: Well, you can — you can argue that — look at a lot of deals that have come in the last week or so, the long end of the tax-free bond market, the high-grade and it’s restored itself to roughly about a three percent yield. That doesn’t sound particularly high and like a — and it doesn’t sound like a particularly rewarding yield if you think about the potential for downgrades down the road or a thinning of debt service coverage, et cetera. It does look relatively cheap when you compare it to a long treasury bond of 135, but I would contend the treasuries are probably a little overbought in here and municipals may be a little cheap and they’re going to eventually meet in the middle.

I think the important part is to keep the long-term really economics of municipalities in the forefront when you’re investing. If you went back to the worst period in our history, which is the Great Depression — and we don’t think we’re going back to that — you had about 1,700 municipal entities in this country stopped paying their debt. It didn’t mean they went bankrupt in a legal sense, but they just stopped paying.

And in the end, as the economy turned around, they all — except for a few dustbowl times in Oklahoma — almost all paid off their debt and arrears, and got turned on their debt and continued to pay. And that’s because of the monopolistic powers that municipalities have. If a meteor came tomorrow and hit the Saint Louis Water Authority, would they stop paying their debt? Yeah, most likely. When they rebuilt things and started to get debt service again, would they repay it? Absolutely.

RITHOLTZ: So, John, in all of this we haven’t talked about the mack daddy in the room, the Federal Reserve. What is the role today of the Fed in the fixed income market?

MOUSSEAU: Barry, the role is probably more important than ever, and you only have to look back at the last few weeks to figure it out. You look at the Fed and how did they step in on this crisis? Well, the first thing is that they fixed the short-term bond market. You think about things like revenue anticipation notes, bond anticipation notes, these are the things that money market funds invest in. Some of them are non-rated. Their — their promise is to pay.

The bid dropped out of the market in the middle of this crisis in mid-March. What the Fed did is they establish credit facilities that would buy these bonds from the money market funds, these (RAMs) and (TAMs) at their cost basis, not at the market, and give them cash, so that kept the money market funds in business. And you can’t really get an improvement in equities until you can improve the bond market. So their first stop was to fix the short-term bond market.

Then you saw the legislation come in where the treasury through the Fed as their agent was going to start to buy municipal bonds one out of five years. It have to be investment grade or better not high-yield. They haven’t done it yet. Just the fact that they established it was enough to really improve the bond market a couple of weeks ago as that packages putting together. So the Fed, through either their ability to do credit facilities or their special ability that buy bonds out through six months which they have and they have not exercised, and now the ability of the Treasury to go through the Fed and try to buy bonds out through five years, all of that has helped shore up the market and has been very important.

RITHOLTZ: So the mere announcement that, hey, we have the ability to buy munis if you want to is sufficient to stabilize the bond market.

MOUSSEAU: Absolutely, and — and it not only has stabilized the short-term market, which is also in disarray, but it helped to stabilize the long-term market because within that confine, there is the ability to take that beyond five years. I mean, State Mnuchin can call up Jay Powell and say we want this extended to 15 or 20 or 30 years, and they could do that.

RITHOLTZ: I recall during the ’08, ’09 crisis the big complaint I heard from the Fed haters and the people wringing their hands over the various rescue packages was that the Fed is adding $3 trillion to their balance sheet. This is going to cause all sorts of trouble. Well, here we are a decade later, what is their $5 trillion on the way to $6 trillion? What does that mean for — fill in the blank — the economy, fixed income, inflation for the Fed to potentially have trillions and trillions on their balance sheet?

MOUSSEAU: Well, what did we learn from the ’08, ’09 and actually it’s essentially three rounds of quantitative easing? It never created inflation even though you saw the Fed take their balance sheet up to what was then record levels and they’re buying treasuries, agencies and mortgages. The key to that was the fact, A, they’re trying to keep rates lower, but it didn’t create inflation because if they bought $100 million worth of treasuries and they bought it from the bank of Barry Ritholtz and deposited $100 million, at two o’clock in the afternoon, the bank of Barry Ritholtz put that money back on deposit at the Fed earning a quarter of a percent. What it was not doing was lending the money out, so the velocity of money and the expansion of money, that way, was not happening. The quantitative easing was effectively keeping rates in — in — in a certain range.

What could cause inflation is the $2 trillion plus clearly more money coming on the government spending side. And that’s what you didn’t have. I mean, you had $800 billion in programs back in the ’08, ’09 crisis. That is going to be tripled or quadrupled here.

I would expect you …

RITHOLTZ: And remember that …

MOUSSEAU: OK.

RITHOLTZ: … remember that $800 billion was — $300 billion was a temporary tax cut, $300 billion was a temporary extension of unemployment benefits. The pure stimulative fiscal part of it was — was barely $200 billion.

MOUSSEAU: Right. And — and you — you saw some other things like the BABs programs, et cetera. You might see a resurrection of something like that. What I …

RITHOLTZ: That’s being Build American — Build America Bonds, right.

MOUSSEAU: Build America Bonds, which is really to try to get municipalities to borrow in the taxable market because the — at that point treasuries were at three and long tax rebonds were at six, so that is really ineffective borrowing. So this allowed them to get a 35 percent subsidy from the federal government, really lowered their borrowing costs to something under four percent. And they were essentially building new things.

So think about a — an airport building a new runway or a state university building a new dorm where they’re pouring concrete, hiring people, building stuff. That was the stimulative nature of it. Whether we see something like that here, we don’t know. The administration has announced that $2 trillion infrastructure policy, but we haven’t seen any particulars on it yet.

I would — I would think though that if you don’t get inflation down the road from this amount of government spending, then we might never see inflation.

RITHOLTZ: Huh, that’s quite — that’s quite fascinating. So let’s — let’s talk about the opposite of inflation. Let’s talk about deflation and negative rates. When — when you started your career, did you ever imagine a set of circumstances where rates could go negative?

MOUSSEAU: No, and I guess one of the nice things of having a long career is I’ve seen the peak in interest rates and I have seen the low in interest rates like forever. You know, you — you don’t think about negative interest rates when you think about textbooks back in the 1980’s or 70’s or even — even 90’s. But you saw negative interest rates and you saw them in Europe over the last year. So if you — if you get back from this particular crisis and go through last year, you saw negative rates.

Not here, and our interest rates dropped in the U.S. last summer really not because the economy here is floundering, but because our rates are too high relative to what was going on around the world. And all negative rate means is that you’re expecting rates to go more negative, so you want to lock in something. Losing half a percent is better than losing one percent. So you want to lock that in.

I think Europe was coming to the agreement that this was not good for banks. And you saw a lot of noise in some movement, and before all this, you’ll start to see rates rise. So Germany had gone from negative 10-year bond rates to actually positive rates.

In the last — in the last few weeks they have gone from negative, like minus 0.9 to up to -0.3, so I think we’re going to move out of the negative interest rate range over time. And I think the idea is if you can get back to a world we have a — a steeper yield curve than the banks are in shape to make money, and you need a decent banking system and a banking system that’s in financial health and can make money to get the economy moving.

RITHOLTZ: They used to call it a zero bound for a reason, I guess so we can’t use that phrase anymore. So — so it sounds like you’re not looking at rates going negative from here even if we have a — a pretty substantial rescue package.

MOUSSEAU: No, I think what you’ll see is you will actually see rates turned positive. I think you’ll see a — a more positive looking yield curve. And I think if all the kind of government stimulus that you see, that should produce a positive yield curve because you’d think you would start to build that inflationary expectations as you go further out, and that’s reflected in the shape of the yield curve as well.

RITHOLTZ: So that leads to the obvious question, are we ever going to see inflation in our lifetime?

MOUSSEAU: I think so. And, you know, if you look — if you look last year at the kind of the middle part of the year, you had a cover of Business Week and it had a picture of some kind of animal and it said — says “The Death of Inflation,” that was good enough for me to realize an inflation is probably coming back. It — it — it takes a while and it will take a while to build up. And I think you wonder about where — where will it end up, what asset class will it end up.

And we’ve seen some of the Fed’s actions in the past that it ends up and maybe small cap stocks or it ends up in the housing market. Does — this time, does it end up in commodities, which are — are, you know, it’s been severely depressed?

You would think that if you come out of this mess, those kind of traditional things like copper, and timber and things of that nature would start to do well. And so I would start to think you’d see some inflation.

RITHOLTZ: And yet throughout this whole post credit crisis recovery period, we’ve seen a huge uptick in multi-family housing construction. We’ve seen a lot of sectors of the economy over the past 12 years slowly come back online and still no inflation. So what’s going to be the — the spark that lights that fire?

MOUSSEAU: You know, it’s hard to say that because you — I think what’s going to be going on here is a lot of it based on demographics. And what you’re going to see is the millennials who, if you draw a belt curve of the millennials, the biggest part of that curve is just starting to turn 30, and they’re just starting to get into the years where they will start to spend money on family formation and all the things the baby boomers did except maybe a little more delayed. And — and a little more delayed partly because of the financial crisis of 2008, ’09.

So kids who get out of college between say 2008 and 2011 were really behind the eight ball a little bit in terms of getting jobs or getting the quality of jobs that people just a couple of years younger got later on. So even they are now approaching that point of lift-off from a spending standpoint. And if you look at the millennials as a group, they are bigger than the baby boomers, so I think that’s where it’s going to come from.

RITHOLTZ: Quite interesting. So normally if we were in the Bloomberg office I would be asking my 10 favorite questions, but we don’t have the full 90 minutes to do that, so I’m just going to give you a speed round, five …

MOUSSEAU: Sure.

RITHOLTZ: … questions, quick answers. Let’s plow right through this.

Where are you streaming these days? Give us your favorite Netflix, Amazon Prime, Disney+ shows.

MOUSSEAU: I am back watching all the Ken Burns specials on baseball, World War, prohibition, et cetera. So, you know, you’re never too old to learn and you’re never too old to relearn.

RITHOLTZ: Quite interesting. Who were your early mentors? Who influenced your career?

MOUSSEAU: Really when I look back a named Billy Gaw (ph) at E.F. Hutton who was a Public Finance Banker. And he — he really kind of took the liking to me and got me into the municipal bond area, and then later on Bob Dow Lord Abbett.

RITHOLTZ: Tell us about your favorite books. What are you reading? What do you like to give as gifts?

MOUSSEAU: I’m big into history. You know, one of my favorite books is “Rise and Fall of the Third Reich,” which is a (inaudible) by William Shirer. I — I go back and read “Free to Choose” by Milton Friedman every once in a while. They make sure I’m oriented the right way. And I’m — I’m trying to read the Ulysses Grant biography right now by Ron Chernow.

RITHOLTZ: Quite, quite interesting. A recent college graduate considering a career in fixed income comes to you and ask for some advice, what would you tell them?

MOUSSEAU: I would say find a spot on any firm and do everything they ask from sweeping the floors to, you know, make sure you show up the first one there every day and find a mentor. But I would give that advice to anybody that’s starting out. If you can find a mentor and — and even if it takes a few years, it is well worth it because you have somebody to bounce ideas off of.

RITHOLTZ: And our final question, what do you know about the world of fixed income today you wish you knew 40 years ago when you were first starting out?

MOUSSEAU: I wish I had known the importance of international flows in currencies. You know, as a — as a municipal bond expert, back 40 years ago you didn’t realize the importance of international flows and how they would affect things. So the fact is that the change in the Chinese currency would affect municipal bond have actually would never occur to you. It definitely affects it today. So I — I think that’s the one thing that I’ve learned.

RITHOLTZ: Quite interesting. We have been speaking with John Mousseau. He is President, CEO and Director of Fixed Income Trading at Cumberland Advisors.

END


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Cumberland Advisors Market Commentary – Central Banks, Capital Markets, Debt/Deflation, Real Income Growth, Interest Rates & Housing

We wrapped up our Labor Day Camp Kotok with a round of excellent on-the-record discussions that we’re happy to share with you here.

Camp Kotok - Big Lake - Stacked Stones - Conversations from Camp Kotok

David Kotok and Charles Plosser at Camp Kotok: The Challenges Facing Central Banks
David Kotok and Christopher Whalen at Camp Kotok: Capital Markets, Debt and Deflation
David Kotok and Doug Duncan at Camp Kotok: Real Income Growth, Interest Rates and Housing

See more interviews and content at Cumberland Advisors’ YouTube Channel:
https://www.YouTube.com/CumberlandAdvisors


David Kotok and Charles Plosser at Camp Kotok:
The Challenges Facing Central Banks

Long-time friends David Kotok, Chairman and Chief Investment Advisor of Cumberland Advisors, and Charles Plosser, Retired President of The Federal Reserve Bank of Philadelphia, take a moment on Labor Day Weekend at Camp Kotok to chat about the role of central banks looking towards the future. Plosser encourages current governments and economic policy makers to be realistic in their expectations of the power of Central Banks to solve all problems.

Central banks are not a panacea, Plosser warns, adding, political pressure is undermining the independence of central banks around the world and their ability to focus on long-term solutions. He cautions that the reliance on central banks to be problem solvers can lead to unconventional policies resulting in unintended consequences—that can be difficult to unwind. Plosser remains optimistic about the remarkable resiliency of the American system of government and our free market economy.

Charles Plosser served as president and CEO of the Federal Reserve Bank of Philadelphia from 2006-2015 when he retired. He is a visiting fellow at the Hoover Institution at Stanford University.


David Kotok and Christopher Whalen at Camp Kotok:
Capital Markets, Debt and Deflation

David Kotok, Chairman and Chief Investment Advisor of Cumberland Advisors interviews Christopher Whalen.

“I have confidence in America’s capital markets,” Whalen said. At the same time, he expressed concern about debt and related deflation in Europe and Asia focusing on the central banks unsuccessful attempts to fix the continuing 10-year crisis. Discussion covers negative interest rates in Europe, America’s ability to heal the crisis in non-bank markets, fishing and French Bordeaux.

Richard Christopher Whalen is an investment banker and author who lives in New York City. He is Chairman of Whalen Global Advisors LLC and focuses on the financial services, mortgage finance and technology sectors.


David Kotok and Doug Duncan at Camp Kotok:
Real Income Growth, Interest Rates and Housing

David Kotok, Chairman and Chief Investment Advisor of Cumberland Advisors interviews Doug Duncan Fannie Mae’s senior vice president and chief economist about his outlook for housing. Duncan acknowledges strong labor force participation noting that new additions to employment are gradually slowing. New jobs are needed to keep unemployment numbers down. Real income growth in the lower tier is rising and low interest rates are fueling refinancing. Duncan is concerned about the impact of tariffs and trade discussions curbing incentives for companies to invest in a global economy. He explains that, “Investment is the driver of productivity gains, and productivity gains are the driver of real income growth, and if people are going to buy a house, real income matters.”

Kotok asks if America might see the negative interest rates that are in Europe now. Duncan responds. “I am hopeful that the fact that the US is still growing, at about 2% growth, is going to be sustained long enough to lead the rest of globe back to …a rational view of interest rates.” Kotok and Duncan remain optimistic about the US economy, fishing, friendship and good wine.

Doug Duncan is responsible for providing all forecasts and analyses on the economy, housing, and mortgage markets for Fannie Mae. Duncan also oversees corporate strategy and is responsible for strategic research regarding external factors and their potential impact on the company and the housing industry.


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

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




Cumberland Advisors Market Commentary – China Panel at Camp Kotok

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

Cumberland Advisors - Camp Kotok China Panel Discussion

The August 2019 China panel held at Camp Kotok packed an extraordinary amount of valuable information into a half hour and is well worth the time you’ll spend to view it: https://youtu.be/Sff0AGPrIJQ


 

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

Beyond the direct China-US trade war, attendees discussed contagion risk, Hong Kong, Argentina, capital flight, and alternative choices for storing value in a world of discredited fiat money, among other issues.

Hungry for more?

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

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

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


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

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




Cumberland Advisors Market Commentary – Camp Kotok, Barry Ritholtz, and the “Shadow Fed”

“Camp Kotok,” is a gathering of prominent economists, wealth managers, traders, heads of research, pundits, financial luminaries and a few journalists that meet each year in a remote part of Maine. Held for a long weekend in the summer, we fish and engage in vigorous debates running the gamut from market valuations and the rise of exchange-traded funds to Federal Reserve policy, virtual currencies, and health care.

This unique opportunity to network and converse under Chatham House Rules, grants attendees the freedom to discuss any topic under anonymity, and yields some terrific insights. A small number of conversations and interviews are made available to the public as well and you can see them at the Cumberland Advisors YouTube channel: https://www.YouTube.com/CumberlandAdvisors

Barry Ritholtz, long-time participant at Camp Kotok, aka the “Shadow Fed”, has just written a piece and spoken on radio about his perspective. You can read his article, “Talking Rates in the Maine Woods With Economists Over Good Wine” at Bloomberg’s website: https://www.bloomberg.com/news/articles/2019-08-27/talking-rates-in-the-maine-woods-with-economists-over-good-wine

And you can listen to the Bloomberg podcast where he relates his observations here: https://podcasts.apple.com/us/podcast/ex-fed-official-calls-to-block-trump-philip-morris/id393107187?i=1000447957017 (Barry chimes in close to the 22min mark)

We appreciate all who’ve take the time to tell their “Camp Kotok” stories and look forward to future years of fishing, debate, and the exchange of ideas.

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


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

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




Cumberland Advisors Market Commentary – Katie Darden and Camp Kotok

Katie Darden, Financial Institutions Research Director at S&P Global Market Intelligence, joined us at Camp Kotok and then published this excellent summary of our discussions: “At Camp Kotok, fears over China and ‘magic money tree’ overshadow Fed policy,” https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=53593818&cdid=A-53593818-12580 .

Leen's Lodge Back Deck

Then Katie joined her bank analyst colleague Nathan Stovall, who authors StreetTalk, a monthly column and blog focused on banking in the South, in a podcast interview in which Nathan first asked Katie to explain the “unique beast” that is Camp Kotok. Katie conjured with this image, which I find both amusing and fitting: “If you can imagine a large group of very smart adults at summer camp, that may come closer to conveying what it is.”

Katie goes on to say that in the ambience of Leen’s Lodge and the Great North Woods, with everyone suited up to go fishing, something magical occurs as professional egos fall away and a camaraderie develops that lets people openly engage on often contentious topics in a way that is often difficult in the outside, workaday world. (She notes that it doesn’t hurt that wifi in Grand Lake Stream can be spotty.)

Fishing Guides & Canoes

With everyone on the same level, says Katie, “You can barge into any conversation that you want, take part in any conversation that you want. I’ve gone to this every year since 2014, and every year I come away feeling that I’ve had this incredible experience that lifts me above the day-to-day, and I’ve gained new insights….”

Then Katie and Nathan launch into the major topics that had our group’s attention this year: China, Fed policy, Modern Monetary Theory, etc. We encourage our readers to check out this entertaining and informative summation of Camp Kotok 2019. Here is a link to the podcast on SoundCloud: https://soundcloud.com/street-talk_spglobal/ep-49 . And here is the link on Apple Podcasts: https://podcasts.apple.com/us/podcast/street-talk/id1277129317 .

We thank Katie Darden and Nathan Stovall for creating this insightful look at our Maine gathering.

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


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

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




Cumberland Advisors Week in Review (Aug 12, 2019 – Aug 16, 2019)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team. These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

MATT MCALEER’S WEEKLY RECAP

This week, we talk about:

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

Matt enjoys your feedback. You can reach him at:
-Link to Matt’s Email: Matthew.McAleer@Cumber.com
-Link to Matt’s Twitter: https://twitter.com/MattMcAleer4
-Link to Matt’s LinkedIn: https://www.linkedin.com/in/matthew-mcaleer-9415b16/

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


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



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


Camp Kotok: Wall Street In The Woods by Dave Nadig

An excerpt…

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

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

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

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

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

Read more at www.etf.com


Camp Kotok MMT panel

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



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

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

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



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


What I Learned at Camp Kotok by John Mauldin

An excerpt…

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

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

Continue reading at www.mauldineconomics.com



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


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

An excerpt from Brent Donnelly

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

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

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


Are you concerned about the Trade War with China?

 

Lessons from Thucydides by David R. Kotok

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

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


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


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




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

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


There are some takeaways:

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

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

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

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

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


 

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

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

Here are three questions for readers to consider:

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

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

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

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

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

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


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

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.




Camp Kotok: Wall Street In The Woods

Excerpt from Camp Kotok: Wall Street In The Woods

by Dave Nadig at ETF.com

 

My experiences at Camp Kotok involve a little bit of shinrin-yoku in the literal sense: There are indeed a few hours a day floating through nature in a boat. But they also involve an intense, highly concentrated kind of economic shinrin-yoku. I surround myself with the zeitgeist and just try and absorb it through osmosis.

Camp Kotok - Wall Street In The Woods - ETF.comUnder the rules, attendees can report specific comments with approval of the speaker (and indeed, we’ve included several in this week’s ETF Prime podcast), or, they can report the “sense of the group.”

So here are my big takeaways, with the caveat that the group’s very diversity turns any “Camp Kotok says … ” into a broad-brush synecdoche that probably says more about my listening skills than anything else.

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

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

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

 

Click the link to read Dave Nadig’s takeaways: https://www.etf.com/sections/blog/camp-kotok-wall-street-woods


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




Bloomberg Surveillance: The Long Party is Over, Kotok Says (Podcast)

David Kotok speaks with Bloomberg’s Tim Fox and Tom Keene

Tune in around the 24:50 mark to hear David weigh in on the “bogeys for the next several years” and the view that the long party is over.

He also talks about takeaways from Camp Kotok and Leen’s Lodge.

Tune in at 20:22 to hear the full interview.

Cumberland's David Kotok on Bloomberg Radio

Kotok: “Hateful belligerency accomplishes nothing.”

This is a Bloomberg podcast.

LISTEN HERE: Bloomberg Audio

NOTE: 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.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




From the Maine Outpost: The Corporate Bond Market – A Frog in Boiling Water?

By Jeanine Prezioso

Federal Reserve monetary policy and its anticipated effects – in addition to the debate over who caught the largest salmon or smallmouth bass – was one of the many discussions bandied about in the northeast Maine woods earlier this month at Camp Kotok, an annual gathering of economists, pundits and investment professionals hosted by Cumberland Advisors’ David Kotok.

From the Maine Outpost- The Corporate Bond Market - A Frog in Boiling Water - by Jeanine Prezioso

Trade wars and a slowdown in the U.S. economy are ubiquitous market concerns, but one focus was the corporate bond market, which is largely in unchartered territory, emerging from a hazy decade of cheap credit.

The amount of high-yield debt sits at record levels relative to the total, while global risks are rising. Credit spreads have widened from the beginning of the year. In the week following the Camp Kotok, Turkey’s currency crisis and uncertainty over U.S. trade policies further weighed on markets.

“You’ve had 10 years of financial valium of low interest rates,” said Kotok, Chairman and Chief Investment Officer of Cumberland. “The risk in credit is rising and the nature of spread widening is underway and that will deal a blow to high yield and to corporates.”

Continue reading at LinkedIn Pulse: https://www.linkedin.com/pulse/from-maine-outpost-corporate-bond-market-frog-boiling-prezioso/