Cumberland Advisors Market Commentary – Liquidity Impact on the Stock Market

All three major indices have continued their rallies in June: The S&P 500 is up 2.23%, the Dow Jones Industrial Average is up 3.54%, and the Nasdaq composite is up 1.33%. The S&P 500 has marked a 42% return since the March 23rd low for the large-cap index, while the Nasdaq Composite is only 2.26% from its all-time high. Although there are a few possible explanations for the performance (e.g. there could be a vaccine ready by the end of 2020; states are reopening without a spike in infections, etc.), there is one important factor we can’t ignore – Fed liquidity.

Market Commentary - Cumberland Advisors - Liquidity Impact on the Stock Market

The Fed has provided massive liquidity to calm the markets since the outbreak of COVID-19 in the US. In its April announcement, the Fed said it could pump $2.3 trillion into the economy through various programs, resulting in a total injection that would exceed its 2008 rescue. Years ago, academic research found liquidity to be an important factor affecting equity returns (Brennan and Subrahmanyam, 1996; Keene and Peterson, 2007). But measuring the liquidity premium in the equity market is still methodologically arduous, especially for Fed-injected liquidity, mainly because of the lack of liquidity measures and the incompleteness of liquidity data. Some common liquidity measures include trading volume, share turnover, etc. In addition to the academic measures, there are some fresh views that may be more tailored to gauging the impacts of the Fed’s actions to provide liquidity.

The first measure is money zero maturity (MZM). MZM represents the liquid money supply such as cash or money in checking accounts. As shown in Chart 1, the S&P 500-to-MZM ratio has averaged 6.04 since 1990, with its all-time-high of 14.04 on March 9th, 2009 – the market bottom of the financial crisis. The ratio fell to its lowest point since the 2008–2009 financial crisis on February 10th, 2020, right around the S&P 500 all-time high. With the Fed’s liquidity injection since then, the ratio has bounced above 7, a bullish signal for the equity market. To generalize this finding, we replace the S&P 500 with all stock-market value. The peak and bottom coincide with the S&P 500, as demonstrated in Chart 2. Besides increasing money supply, the Fed also lowers the interest rate during quantitative easing. Next, we scale the S&P 500 and analyze where the inflated nominal value has stood across time. Because the effective federal funds rate (EFFR) is now virtually zero, we use the prime rate instead in Chart 3. The ratio had hovered around the summer 2015 level before the Fed began pumping liquidity earlier this year. But the ratio has risen to a new all-time high in the past month.

All liquidity measures from the Fed’s COVID-19 stimulus are bullish for the market currently. If the Fed keeps its foot on the liquidity gas pedal, the ratios are likely to continue their strong momentum, making the market bullish from the liquidity perspective.

Leo Chen, Ph.D.
Portfolio Manager & Quantitative Strategist
Email | Bio

*Data from Bloomberg, last updated on June 4th, 2020


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Cumberland Advisors Market Commentary – Mexico’s Twin Crises: The Pandemic and a Plunging Economy

South of the border, our neighbor and the second largest economy in Latin America, Mexico, is experiencing a severe and still worsening health crisis due to the COVID-19 pandemic. The dire effects of the illness itself are compounded by a brutal decline in the economy, which at the start of 2020 had already been in recession for most of the past year.

Market Commentary - Cumberland Advisors - Mexico's Twin Crises The Pandemic and a Plunging Economy

Mexico has recorded over 10,000 deaths from COVID-19 and almost 100,000 confirmed cases. As the country is testing at a much lower rate than most other countries are – the lowest rate among the OECD nations – it is evident that the actual rates of deaths and cases there are significantly higher than the confirmed numbers. Like Bolsonaro in Brazil, Mexico’s leader, President Andrés Manuel López Obrador, has sought to play down the pandemic and was slow to act in shutting down the economy to limit the spread of the disease. He said that COVID-19 was “not as bad as the flu.” Since late April, he has been claiming that Mexico has tamed the crisis, but last week the country saw its highest daily increases in deaths and new cases. Nevertheless, just last Thursday López Obrador claimed once again, “We are doing well; the pandemic has been tamed.” The government announced that it is reopening after two months of quarantine, even as Hugo López-Gatell, the official in charge of Mexico’s pandemic response, admitted that he does not know the actual case and death rates. Social distancing measures are being lifted nationwide, apart from areas listed as red zones. Yet most of the country remains red.

It should be noted that even Latin American countries whose leadership acted swiftly and wisely are suffering heavily from the pandemic. Peru has seen a dramatic rise in cases even though its government moved quickly to mandate stay-at-home orders, curfews, and border closings. Two factors shared by Mexico and indeed most countries in Latin America account for this outcome: inadequate healthcare systems and income inequality that ranks among the world’s worst.

These countries have large shares of the population (more than half of the adults in Mexico) working in the informal sectors of the economy; and, regardless of lockdown orders, these people need to go to work every day to survive. Also, millions of the poor live in the region’s huge metropolitan centers, like Mexico City, in densely crowded barrios or favelas where social distancing is impossible.

Most countries in Latin America have also neglected for years to invest adequately in their healthcare systems. Costa Rica is an exception and has an infection rate lower even than that of New Zealand. Meanwhile, the hospital systems of both Peru and Brazil are becoming overwhelmed by the pandemic. Mexico’s healthcare system is broken, following years of neglect. Mexico has devoted less than 3% of its GDP to health care. Only two countries in Latin America, Guatemala and Venezuela, spend a smaller share of their national output on health care. Shortages of doctors, nurses, and equipment are claiming lives in Mexico, where lack of medical attention and even negligence result in poor outcomes. One in five confirmed cases are healthcare workers. More than 11,000 healthcare workers have been stricken.

As COVID-19 cases and deaths continue to rise, Mexico’s economy has fallen into a deep recession caused by the shutdown in Mexico, with impacts evident in all its major markets. Last year the economy fell 0.3% at a time when emerging-market and developing-country economies advanced some 3.7%. Then, in the first quarter, Mexico’s economy contracted 1.2% from the previous quarter (down 4.9% in annualized terms), with industrial output down 1.2% and services down 0.9%, reflecting early pandemic effects that began in March.

Mexico’s central bank, the Bank of Mexico, projects that the economy could decline as much as 8.8% this year. The shutdown in April of all industries and services considered as nonessential, which for the most part extended through May, caused an unprecedented drop in output in the first two months of the second quarter. The manufacture of cars and auto parts fell to close to zero, as did air traffic to popular tourism resorts. Exports of Mexican goods in April were down 41% from the level reached in April 2019. Business confidence declined in May, as did the INEGI Manufacturing Purchasing Managers Index, following declines in April and March. The fall in oil prices and reduced remittances from Mexicans working in the US are other headwinds for the economy. Stimulus measures by the government and the central bank to counter these developments have so far been relatively weak.

Mexico has now begun to reopen its economy, moving toward what President López Obrador calls a “new normal.” The auto sector has been designated as essential along with mining and construction in order to give them a head start. Pressure from the US to restore cross-border supply chains has been a factor in these early reopenings. The US National Association of Manufacturers urged action in tandem with industrial reopening in the US. Mexico’s positive response to this pressure is understandable since the United States is the destination for some 80% of Mexico’s exports. The shape and speed of the recovery in Mexico’s economy will depend heavily on the recovery in the US. We anticipate that the reopening of the US economy will generate strong growth numbers in the second half of 2020. Those numbers will be a positive factor for Mexico. Yet we think the downside risks for Mexico’s economy and for Mexican stocks are significant in view of the uncertainty about the current spread of COVID-19.

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

____________________________________________________________
Sources: Financial Times, Bloomberg, New York Times, Wall Street Journal, BBC.com, CNN.com


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Cumberland Advisors Market Commentary – Inflation, Deflation, and Capacity Utilization – Part 2

Bloomberg’s Lisa Abramowicz recently tweeted, “When you measure the prices of things Americans are spending money on right now, ‘it turns out that the actual inflation rate is not as low’ as the data suggest” (https://twitter.com/lisaabramowicz1/status/1263868020516151298). Her evidence was a chart showing how spending for food at home had jumped while spending on food away from home had declined significantly. But it turns out that it isn’t enough to look only at prices of individual items. We must also consider what weight they get in computing overall inflation.

Market Commentary - Cumberland Advisors - Inflation, Deflation, and Capacity Utilization – Part 2

The Dallas Fed has just released its April trimmed mean PCE inflation rate, which is touted as a measure of the overall movement of inflation based upon the Bureau of Economic Analysis’ Personal Consumption Expenditures Index (PCE). What is unique about the measure is that it throws out the extreme monthly movements of prices on both the high side and low side. Of the approximately 178 components examined (note that the BLS considers 300 such components in computing the CPI), it totally omitted 62 components with the highest increases and 60 components with the largest price declines. The measure compares the annualized one-month rate, 6-month rate, and 12-month rate with both the BEA’s PCE Index and PCE ex food and energy (https://www.dallasfed.org/research/pce). Below is a snapshot of those comparisons.

What are we to learn from this comparison? First, the trimmed mean tells a more benign story about the most recent monthly change than do the sharp declines in the PCE and PCE ex F&E. Second, that conclusion is reversed when we look at the 6-month comparisons and a more concerning story on a 12-month basis. So what should we conclude? The monthly story showing the annualized data says this is what the inflation rates would be if the monthly changes were to persist for the next 12 months. Do we really believe that prices will decline each month for the next 12 months as they did in April? In the current environment, it is highly unlikely that this will be the case. The one-month percentage change in the trimmed mean PCE would be only 0.42%. Similarly, the year-over-year comparisons show a much higher rate of inflation for the trimmed mean PCE than for the other two measures. When we seek to make sense of these differences, we find that the devil is in the details and especially in what we are willing to assume about inflation dynamics. Do we believe that all prices move together, or do some prices lead and some lag? If the latter is true, then the trimmed mean throws out critical information about inflation dynamics. If we don’t, then the trimmed mean throws out monthly noise.

Fortunately, the Dallas Fed also publishes the detail behind its calculations. The detail shows annualized monthly changes for some 178 components together with their weights. The component with the highest percentage increase was eggs, which increased 497.2% in price. This instance illustrates how misleading the reported change is using annualized numbers, since no one believes or can reasonably assert that the price of eggs will increase that much over the next year. The one-month percentage increase April was 16.1%, which compares with a 2.8% increase in March. On an annualized basis the March increase would translate to 39%, but we know that figure is unlikely to be a good representation of inflation dynamics. It is also worth noting that the price of eggs gets only a weight of 0.12% in the index. The item with the greatest weight in the index for April, as was the case in March, is the imputed cost of an owner-occupied home, which accounted for 14.2% of the index in April. That cost showed a 2.1% increase for the month. In the case of the trimmed mean, the excluded components whose prices declined accounted for 24.3% of the weight in the PCE; the included portion accounted for only 44% of the index; and the excluded items with price increases accounted for 32% of the trimmed mean. That said, it is interesting that of the 178 components in the trimmed mean PCE Index, 93 actually showed increases; 6 had no change; and 79 showed price declines. Finally, of the top 10 items that are experiencing the largest price increases and that have the greatest weight in the index, 7 are food-related, one is prescription drugs, and one is paper products (no surprise there). Together, these 10 items added only 20 basis points to the overall PCE index produced by BEA. The 10 items which have the greatest weight in the index and which are experiencing price declines (including, for example, gasoline and men’s and women’s clothing) subtracted 60 basis points from the overall index.

So the picture that emerges is not as clear as Lisa Abramowicz’s tweet would have us believe. The prices of some goods that are important to people, like certain foods, have gone up, while the prices of other goods and services, like gasoline, have declined. Furthermore, it is also clear that the dynamics of those price movements are due to significantly different factors. Food prices at grocery stores have gone up as a result of increased demand, in part because of trends like hoarding and eating at home instead of at restaurants, and in part because of disruptions that COVID-19 has caused in the supply chain. On the other hand, the decline in gasoline prices is due to the Saudi/Russian jousting over production, which has been exacerbated by declines in demand in the US as people have cut back on driving. In short, it is important to look at the detailed data and not to extrapolate one-month price changes and then annualize them as if they will persist for an entire year.

(Part one of this discussion was published on May 22, 2020 here: https://www.cumber.com/cumberland-advisors-market-commentary-inflation-and-capacity-utilization/)

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


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Cumberland Advisors Market Commentary –  Two Covers; Two Sectors

If you looked at the two different covers of The Economist for May 30, 2020, you saw the 100,000-death message on the American version, and you saw the Hong Kong security law depiction on the Asian edition. Internal content was mostly the same, but the lead stories reflected the world as the Economist editors saw it and wanted to portray it to their readers.

The-Economist-Covers

In my view, The Economist is the finest weekly global news magazine in the English-speaking world.

In the US, the contrasts in economics and financial markets are extraordinary. The stock market is setting recovery new highs, one after another. See the May 29th “Week in Review” video by Matt McAleer and the charts he uses in his discussion of the trading strength of this monster rally in the US market (https://youtu.be/isgC8sSacEI).  Anyone interested in those charts can email me, and I will ask that they be sent to you. At least one viewer found them hard to see on the video (beginning at 2:47).


 

The US higher-grade bond markets seem to be calming down. John Mousseau talks about them at the beginning of the May 29th weekly video clip linked above. Readers who like the Mousseau beard or who dislike it are invited to send an email to John and voice an opinion. There is a charity bet underway, so feel free to make your opinion known directly to John.

You can get the sense of Cumberland’s various portfolio positions from those two clips, so I won’t take time to repeat the points John and Matt make here. But there is an additional portfolio issue worth discussing that last week’s videos did not cover. The issue is what will happen to the US dollar in the FX markets and how that will impact the Energy sector and the Materials sector. The two covers of the Economist help frame this debate.

What is happening to Hong Kong is a geopolitical shock. A Cold War of words is intensifying between the two largest economies in the world. Some of the policy issues are troubling. Why fight with the WHO in the midst of a global pandemic when you need to achieve globally interdependent and curated outcomes in treatment and vaccines? If the US wants to pressure China, why not move for Taiwan’s admission to world bodies like the WHO instead of withdrawing (running away from the fight). Why not open the US visa program to Hong Kong citizens like the UK just did? We have done that in the past with Hungarians when a similar power shift occurred. We did that with Cuba after the Castro power grab. The intellectual property transfer to the US from China (Hong Kong) and the brain drain we could impose on China would be enormous. All could hugely benefit the United States.

Hong Kong is a monetary and financial center, and capital flight is underway. America can benefit immensely by attracting the flows and the talent. Our doing so will alter the US dollar for the benefit of the United States. We are still the strongest financial center in the world.

The two Economist covers also reveal the underlying determinants of stock market participation for the Energy sector and the Materials sector. Both sectors do well when the world’s economies are growing. Both are weakened by worldwide recession or depression. Both require longer-term capital investment, and neither can turn production on or off in a split second. Opening or closing a mine or shutting down a natural gas pipeline or drilling platform takes time and costs money. Companies try to manipulate the volumes rather than make “on or off” binary decisions. The COVID-19 shock was abrupt and not a business-cycle transition. If there is no second killer wave, the economic bottom at a very low level is happening now, and the recovery will accelerate for the rest of the year. Coming off such a dramatic and extreme shock means that the initial phase of recovery will be robust because it starts from such a low point.

Recovery means that demand will increase in the Energy and Materials sectors, though we do not yet know how fast demand will increase and in what components. And remember, both sectors are global in nature, and most commodities are traded and priced in US dollars in their worldwide trading regimes. This is where the two covers of the Economist come together. One cover warns about the fluctuation of the US currency and the geopolitical risk. The other warns about death and disease in America and the vast divide in American politics. The tragic death of George Floyd and the events that have erupted in response only confirm how fragile the American civil society has now become.

At Cumberland, we are in constant discussion about the Energy and Materials sectors. Matt McAleer and I have talked about them, and our research focused on them every day of last week. Energy, for example, is now about 3% of the capital weight of the S&P 500 index. That is a remarkable low point in the entirety of the post-World War 2 period. Having traded the sector twice in the last few years and lost both times, we are warned about the old adage, “Fool me once and shame on you; fool me twice and shame on me.” Do we take a third attempt with the Energy sector? The same logic can be applied to the Materials sector.

We have taken overweight positions in alternative forms of energy. We are overweight the solar and wind-power sectors and also hydroelectric power as part of an ESG strategy. In fact, those positions are very heavily overweighted in our US ETF portfolios. We would point to the new Gemini project in Nevada as a billion-dollar solar power structure that will power 200,000 households: “U.S. Approves Giant Solar Project in Nevada,” https://www.wsj.com/articles/u-s-approves-giant-solar-project-in-nevada-11589216400. For readers who want a lot of detail about why that move makes sense now, here’s a link to an in-depth discussion on solar power: “Solar’s Future is Insanely Cheap (2020),” https://rameznaam.com/2020/05/14/solars-future-is-insanely-cheap-2020/.

Two covers, two videos, two sectors. As of this writing, Cumberland hasn’t bought any direct positions in Energy or Materials. Please note that could change at any time.

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 Commentary – S&P 500 After COVID-19

The S&P 500 Index is widely used as the benchmark for over $9.9 trillion in investments. After losing 35.4% in just a month, the index has rebounded 36.5% from its March 23rd bottom. These extraordinary numbers during extraordinary times are unlikely to continue after COVID-19’s impacts on the market subside. So what can we expect from the S&P 500 after the pandemic? We will discuss the question from market-construction and earnings perspectives.

The S&P 500 Index selects 500 leading companies that are domiciled in the US, by market capitalization. The 505 stocks – yes, there are 505 stocks in the index at this moment due to different class shares – currently total about $25 trillion in market cap. Along with market cap, financial viability is another important criterion for selection to the index: The sum of the four most recent consecutive quarters of generally accepted accounting principles (GAAP) earnings, as well as the most recent quarterly earnings, are required to be positive. Some large-cap stocks have experienced sharp drops, unprecedented in magnitude, during the COVID-19 sell-off. For example, Macy’s lost 81.3% from its all-time high in February, and Boeing lost 77.2% from its all-time high in March. Unlike Boeing, Macy’s was removed from the S&P 500 at the first quarterly rebalancing because of its small market cap. The market cap threshold for the S&P 500 is approximately $2 billion now. If uncertainty about the second wave of COVID-19 keeps market volatility around the 25–40 VIX level, then it is possible that the S&P 500 will reshuffle a few more stocks this year. Moreover, the earnings requirement could add to the purge in the index.

Chart 1. S&P 500 Total Weight

Because the S&P 500 is a cap-weighted index, the asymmetrical impacts of COVID-19 on the 11 sectors will likely diminish and inadvertently narrow representation in the S&P 500. For instance, the three largest sectors, Information Technology, Health Care, and Communication Services, account for 25.7%, 15.4%, and 10.8% of the index respectively; while the three smallest sectors, Energy, Real Estate, and Materials, together account for only 8.4%. As Chart 1 above shows, the top five stocks (Microsoft, Apple, Amazon, Facebook, and Alphabet) account for approximately 19.3% of the index weight – above the 18% that these five reached during the tech bubble – while the top 40 stocks account for about 50%. The average year-to-date return of the largest five stocks is 15.36%, meaning that these five stocks alone have contributed roughly 3.14% growth to the S&P 500 Index in 2020. If crowded trades continue, the index may experience even more concentrated growth from the largest companies. COVID-19 could narrow market leadership to an extent we have never seen before.

Chart 2. Largest Five Stocks YTD Performance

Earnings uncertainty will be a big question mark. According to FactSet, the current yearly earnings estimate for the S&P 500 is $128.49, down from $177.81 on December 31st, 2019. In addition, one third of S&P companies have pulled their guidance. If we use the current earnings estimate as our baseline, today’s S&P 500 level reflects a 23X P/E multiple. As Table 1 below shows, if the multiple remains at 23, earnings per share need to be almost $148 for the S&P 500 to recover to its previous all-time-high of 3386. However, as evidenced by Table 2, P/E can rise significantly above the historical average during a bear market recovery, especially when interest rates are suppressed. Since the Fed is set to keep rates at zero for the foreseeable future, it would not be impossible for the S&P 500 to hit a new all-time-high in 2020, as analyzed in Table 1.

Table 1. P/E Sensitivity Analysis

Table 2. P/E History

In a word, COVID-19 has distorted the equity market. The S&P 500 may become even more mega-cap-fixated than before. Earnings uncertainty may surprise investors to the upside with P/E multiple expansion, thanks to the Fed’s zero-interest-rate policy (ZIRP). But as a word of caution, P/E investing may be quite unreliable, since we do not have any clear image of earnings going forward. But P/E will certainly be a helpful indicator once we get to the second-quarter earnings season.

(Data from Bloomberg as of May 26th, 2020)

Leo Chen, Ph.D.
Portfolio Manager & Quantitative Strategist
Email | Bio


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

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Cumberland Advisors Market Commentary –  COVID-19 Impacts & Philanthropic Opportunities: GGA Interview with Atlanta Fed President Raphael Bostic

Good Sunday Morning, and please take some time for a walk with your earbuds. We have for you a video call between Lydia Clements, director of the Georgia Grantmakers Alliance, and Raphael Bostic, president and chief executive officer of the Atlanta Fed: https://www.youtube.com/watch?v=EWIj8iNV6QU.

Interview between Lydia Clements & Atlanta Fed President Raphael Bostic

At the SECF website the Georgia Grantmakers Alliance (GGA) is described as “a nonpartisan group open to all private grantmakers, regardless of SECF membership” (https://www.secf.org/OUR-REGION/Geographic-Affinity-Groups/Georgia-Grantmakers-Alliance). The GGA forges, strengthens, and expands connections among private grantmakers in Georgia to explore issues, share learning, and promote sound public policy. 

The video is an interview of Atlanta Fed President Raphael Bostic, covering the application of Federal Reserve policy combined with a very thoughtful and highly specific commentary about philanthropy. We strongly recommend it for anyone who is a donor, trustee, nonprofit employee, or charitable activist. Please note that Cumberland has clients in the charity space. We found this interview to be an hour well spent.

President Bostic analyzes in some detail the impact COVID-19 has had on lower-income communities and small businesses and outlines roles for philanthropic response. He notes the Atlanta Fed’s own response in providing liquidity “in a bold and aggressive way” including its paycheck protection liquidity facility program, its mainstream lending facility program, and its municipal liquidity facility program. Bostic notes the Atlanta Fed’s broader focus on fostering economic mobility and resilience, with an increased emphasis on resilience in light of economic impacts driven by the pandemic. Key to the post-pandemic recovery is urgently needed support that keeps parts of the economy from shutting down and keeps workers connected to their employers.

Please note the slides used by President Bostic, starting around minute 25. Note the rise in demands on charities that is occurring simultaneously with the fall in revenue.

Interview between Lydia Clements & Atlanta Fed President Raphael Bostic Slide 01

Interview between Lydia Clements & Atlanta Fed President Raphael Bostic Slide 02

Interview between Lydia Clements & Atlanta Fed President Raphael Bostic Slide 03

Interview between Lydia Clements & Atlanta Fed President Raphael Bostic Slide 04

The importance of nonprofits as we bridge the transition from COVID onslaught to post-vaccine recovery cannot be understated. Hat tip to GIC board member Stephanie Mackay for sending the link. We strongly encourage readers to listen to the entire conversation for Bostic’s analysis of the structural challenges for resilience and recovery and his vision for the roles that philanthropy can play by embracing opportunities for flexible, nimble response.

A final thought.

The words philanthropy and charity both have their roots in Greek. Here are links on the etymology of each word. Philanthropy: https://en.wikipedia.org/wiki/Philanthropy#Etymology. Charity: https://en.wikipedia.org/wiki/Charity_(practice)#Etymology. In today’s world, the words are used almost interchangeably, but in the course of human history we find nuanced differences. Nearly every religion teaches the importance of charity. Helping others in need reaches back at least as far as the origins of written human history. Charity has often been called for when disease has reared its head periodically throughout history. Here is a page on the bubonic plague that befell Athens in 430 BC, during the Peloponnesian War: https://www.ancient.eu/article/939/the-plague-at-athens-430-427-bce/. And here is a history lesson about the origins of philanthropy and how it has developed: “Philanthropy in ancient times: some early examples from the Mediterranean,” https://sofii.org/article/philanthropy-in-ancient-times-some-early-examples-from-the-mediterranean.

And now in 2020 we face this historic moment of plague and charitable response. What we do and how we do it will create the legacy of our times when it is revealed in the history written about us.

Have a happy and, I hope, a seriously thoughtful Sunday.

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

 


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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 (May 26, 2020 – May 29, 2020)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team.

Week In Review

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.

CUMBERLAND ADVISORS’ WEEKLY RECAP

As part of Cumberland Advisors’ continuous effort to maintain strong customer relationships, we offer this week’s short video discussing current market conditions and how we are positioning portfolios.

Dear Clients & Friends,

Thank you for joining Cumberland Advisors for this end-of-week update on market conditions, bonds & equities with me, Matt McAleer, and John Mousseau. David Kotok joins us in a separate video further down in this commentary.

This week:
John Mousseau’s Update on the Fixed Income Market
-Very quiet week in the bond market
-A continued narrowing between Munis and Treasuries, but not much
-Demand for Munis is back – some can be in their own universe
-Jobless claims are down a little – good sign
-The economy continues to open up and progress
-Overall a boring week. We like boring over all the volatility earlier this spring!Matt McAleer on Markets
-Encouraging to see a bid in small and mid caps
-We have some charts to share with you
-Lean on analytics and data to achieve a flexible view
-Where do we have cash?
-The strongest markets never let you in
-The weakest markets never let you out
-We’re in a very strong market
-1st chart – This chart measures the percent of stocks in the S&P 500 currently trading above their 10 week moving average
-2nd chart – When the S&P trades 10% above its 50 day moving average – very rare! How rare? It’s only occurred six times since 1955.

David Kotok talks about Masks, Markets, and ETFs
-Good to get outside (with a mask!)
-Societies that wear masks have better outcomes, we’re new to this
-I wear a mask to protect myself and you if I contract the virus and am asymptomatic
-Unusual times, incredible series of events, unthinkable in any forecast, unpredictable
-Let’s talk markets
-In our US ETF portfolio we are:
* Overweight Healthcare – we have remained that way and continue that way as of today
* Overweight ESG – Solar, Wind, Water – we have been that way and we continue that way
* Overweight Defense – the Defense Aerospace sector. I wish it weren’t so but the world looks to be getting more dangerous
* We are not fully invested today, we have a cash reserve, it has been there and it continues to be there. We’ll see when we’ll deploy it.
* We do not know how the economics will unfold, we do not know if a second wave of the virus is coming, and we do not know when we will have widespread vaccination and effective treatments
-Please be safe and careful

Thanks for joining us again this week. Please reach out with any questions/comments you may have about this update; we appreciate your calls, comments, and emails. Watch in the player above or at this link: https://youtu.be/isgC8sSacEI

Direct link to David’s video is here or watch in the player below: https://youtu.be/ouXWLBu8SE0

 

Stay safe, healthy, and have a great weekend.

-Matt McAleer

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-c-mcaleer/
-Call Matt: (800) 257-7013

Other questions or comments? Email us at info@cumber.com or give us a call at (800) 257-7013.

Contact Matt or any one of our advisors by following this link: https://www.cumber.com/our-people/


Bloomberg Daybreak Australia: David Kotok Discusses Dislocation in Markets/Economy

May 27, 2020 – Running time 48:27 – David joins at the 8:20 mark

David Kotok, Chairman & Chief Investment Officer at Cumberland Advisors, discusses markets, market dislocation, the economy, coronavirus, growth rates, liquidity, the bargain he sees in municipal bonds, and more. Hosted by Haidi Stroud-Watts.

Bloomberg Daybreak Australia with David R. Kotok (05-27-2020)

Watch here: https://www.bloomberg.com/news/videos/2020-05-27/-bloomberg-daybreak-australia-full-show-05-27-2020-video


Cumberland Advisors Market Commentary

Cumberland Advisors Market Commentary offers 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. Our readers appreciate its timeliness, depth of analysis, and quality of research.

To read current and past commentaries, visit https://www.cumber.com/category/market-commentary/


Hydroxychloroquine

Author: David R. Kotok , Post Date: May 29, 2020

Market Commentary - Cumberland Advisors - The Debate Over Hydroxychloroquine

The Debate Over Hydroxychloroquine President Trump’s surprise announcement on Monday, May 18, that he is taking hydroxychloroquine as a preventative against COVID-19 prompted Fox News host Neil Cavuto to quickly warn, “If you are in a risky population here, and you are taking this as a preventative treatment to ward off the virus or in [Continued…]

Money, Taxes, Fed & COVID-19

Author: David R. Kotok, Post Date: May 26, 2020

Market Commentary - Cumberland Advisors - Money, Taxes, Fed & COVID-19

At the following link readers may download a PDF file of the May 15th Joint Committee on Taxation analysis of federal receipts attributable to the latest stimulus bill passed by the House: https://www.jct.gov/publications.html?func=startdown&id=5260. The pressure for the Senate to act is growing daily and will only intensify. We expect something to come in the way of [Continued…]

Memorial Day

Author: David R. Kotok, Post Date: May 24, 2020

Memorial Day

“Originally, Memorial Day was known as Decoration Day, meant to honor the Union and the Confederate soldiers who died during the American Civil War. By the 1900s it had become a day to celebrate all American soldiers who died while serving in the military. It wasn’t until 1967 that it was legally named Memorial Day.” (Source: https://www.softschools.com/facts/holidays/memorial_day_facts/158/) When I served in [Continued…]

Inflation and Capacity Utilization

Author: Robert Eisenbeis, Ph.D. & David R. Kotok, Post Date: May 22, 2020

Cumberland Advisors' Robert "Bob" Eisenbeis, Ph.D.

At Cumberland, we continuously have internal strategy discussions. We decided to make one such discussion, on the subject of inflation and US capacity utilization, available in the form of a commentary to clients, consultants, and all readers. Below you’ll find a summation of our discussion, written by Bob Eisenbeis, Cumberland Advisors Chief Monetary Economist. -David [Continued…]

COVID-19, stock market, some Senators’ behavior

Author: David R. Kotok, Post Date: May 21, 2020

David R. Kotok

It’s no wonder that citizens, voters and disaffected non-voters, investors and market agents, as well as others who observe the United States, have a low opinion of the Congress. Behavior of one reflects on all. Nothing new there. But the virus crisis has taken regard for Congress to a new low level as the country [Continued…]

Cry for Brazil, and also for Latin America

Author: William Witherell, Ph.D., Post Date: May 20, 2020

Market Commentary - Cumberland Advisors - Cry for Brazil, and also for Latin America by William Witherell, Ph.D

The coronavirus is tearing through Brazil, a country ill-equipped to fight the pandemic. It’s hard-right populist leader, Jair Bolsonaro, has dismissed the virus as a “little flu.” COVID-19 is spreading through the population of 210 million, savaging both the inhabitants of the indigenous villages of the Amazon and the 13 million people packed together in [Continued…]

Zika Vaccine

Author: David R. Kotok, Post Date: May 19, 2020

Zika-Pamphlet-by-David-R-Kotok

What seems like ages ago, we wrote about Zika. Multiple commentaries became a pamphlet which was and is available free. Here’s the link: https://www.cumber.com/zika/. In that pamphlet is a chapter about how a political fight held up Zika vaccine research for a year. The costs in human and monetary terms are estimated in the pamphlet. [Continued…]

Inflation/Deflation: What Do We Know Now?

Author: Robert Eisenbeis, Ph.D., Post Date: May 18, 2020

Cumberland Advisors' Robert "Bob" Eisenbeis, Ph.D.

The most recent CPI numbers show a decline of 0.8% for the month of April, triggering questions about both a possible deflation and where prices are likely to go in the future. The fact is that no one knows what inflation will do in the short run, and all we have to go on, as [Continued…]


Financial Markets & the Economy – Financial Literacy Day.

Cumberland Advisors in partnership with the University of South Florida, Sarasota-Manatee (USFSM) and the Global Interdependence Center (GIC) are proud to host this annual event.

If you were able to attend our February 14, 2020 event in person, you know how valuable the information was and still is. Didn’t make it? Enjoy it now, on-demand.

Financial Markets & The Economy - Financial Literacy Day Stream Play Now

As news of the coronavirus and its spread was mounting, we offered anyone in attendance a facemask as a precaution. This was two weeks in advance of the CDC making its recommendation and is an example of one of the forward thinking positions we endeavor to employ when it comes to our firm.

The University of South Florida, Sarasota-Manatee (USFSM) has once again provided a replay of the day’s event via their streaming server. Please click the graphic above or visit the following link to watch “Financial Markets and the Economy – Financial Literacy Day 2020.”

https://mediasite.usfsm.edu/Mediasite/Play/b1093c21f612418e83b4f36e274f1c531d

Presentation Documents

The documents are supplementary and provide further information and context to the presentations.

Also, see Bloomberg’s website for Mike McKee’s interview with Loretta Mester, President and CEO, Federal Reserve Bank of Cleveland. Loretta was our keynote speaker and Mike joined us for the day at the University Of South Florida Sarasota-Manatee.


Cleveland Fed President Loretta Mester Video with Play Button
To watch, click the picture above or follow this link: https://www.bloomberg.com/news/videos/2020-02-14/fed-s-mester-on-u-s-economy-coronavirus-risk-and-rates-video


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

Sign up for our FREE Cumberland Market Commentaries

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




Cumberland Advisors Market Commentary –  Hydroxychloroquine

The Debate Over Hydroxychloroquine

Market Commentary - Cumberland Advisors - The Debate Over Hydroxychloroquine

President Trump’s surprise announcement on Monday, May 18, that he is taking hydroxychloroquine as a preventative against COVID-19 prompted Fox News host Neil Cavuto to quickly warn,

“If you are in a risky population here, and you are taking this as a preventative treatment to ward off the virus or in a worst-case scenario you are dealing with the virus and you are in this vulnerable population, it will kill you. I cannot stress enough: This will kill you.”

Cavuto added,

 “A VA study showed that among a population in a hospital receiving this treatment, those with vulnerable conditions – respiratory conditions, heart ailments – they died.”

He also mentioned that other studies have similarly found that hydroxychloroquine is ineffective at treating COVID-19.

Right after Cavuto went off the air, Fox News host Greg Gutfeld of “The Five” encouraged viewers to take the drug:

 “If it’s available to you and you can take it, you do it,” Gutfeld said. “That’s a prudent way of looking at it.”

 (Business Insider, May 18, 2020, https://www.businessinsider.com/fox-news-neil-cavuto-shocked-trump-hyroxychloroquine-announcement-video-2020-5)

 That evening, the president tweeted,

“@FoxNews is no longer the same. We miss the great Roger Ailes. You have more anti-Trump people, by far, than ever before. Looking for a new outlet!”

(Donald J. Trump, Twitter, May 18, 2020, https://twitter.com/realDonaldTrump/status/1262563582086184970)

The most important takeaway for investors is to keep an eye on what policies, treatments, and preventions transcend the political fray and result in a steady decline in coronavirus cases, allowing economies to continue their gradual restarts. A major risk via a second wave of contagion could threaten the already-weakened business environment so a false-start on any policy, treatment, or prevention can result in a move in markets.

Regarding the VA study, Trump remarked that it involved “people that aren’t big Trump fans.” He added, “It was a very unscientific report, by the way.”

(Fox News, May 18, 2020, https://www.youtube.com/watch?v=cGTfW2gb2SI, minutes 31:45, 32:50)

Fox News host Laura Ingraham, who for several months has been touting hydroxychloroquine, has laid out the case against the VA study, focusing on the fact that it involved only patients who were in the advanced stages of COVID-19 infection, had already been intubated, and subsequently died. She quotes the eminent but controversial French virologist Dr. Didier Raoult, who has stated in response to the VA study, “This is unreasonable [treatment] at the time of the cytokine storm, as it is unlikely that hydroxychloroquine alone would be able to control patients at this stage of the disease.”

(Fox News, April 22, 2020, https://www.youtube.com/watch?v=RexUJeWmzSE, minute 4:10)

Thus Cavuto failed to draw an important distinction: You may die if you have a serious case of COVID-19, are intubated, and take hydroxychloroquine; but it might not be the hydroxychloroquine that kills you. Correlation, as we know in our financial market and economic business, is not causation.

Dr. Raoult is interesting. A May 12 profile in the New York Times Magazine had this to say about him:

“Raoult, who founded and directs the research hospital known as the Institut Hospitalo-Universitaire Méditerranée Infection, or IHU, has made a great career assailing orthodoxy, in both word and practice. ‘There’s nothing I like more than blowing up a theory that’s been so nicely established,’ he once said. He has a reputation for bluster but also for a certain creativity. He looks where no one else cares to, with methods no one else is using, and finds things. … He detests consensus and comity; he believes that science, and life, ought to be a fight.

“It is in this spirit that, over the objections of his peers, and no doubt because of them, too, he has promoted a combination of hydroxychloroquine, an antimalarial drug, and azithromycin, a common antibiotic, as a remedy for Covid-19. He has taken to declaring, ‘We know how to cure the disease.’”

(“He Was a Science Star. Then He Promoted a Questionable Cure for Covid-19.” New York Times Magazine, May 12, 2020, https://www.nytimes.com/2020/05/12/magazine/didier-raoult-hydroxychloroquine.html)

In a groundswell of hopeful enthusiasm, Dr. Raoult’s treatment has been authorized for testing or use in many countries around the world, including the US, France, Italy, China, and India.

In the US, the Food and Drug Administration issued an Emergency Use Authorization on March 30 that allowed the use of these drugs in COVID-19 patients who were not enrolled in clinical trials. Science magazine reported that a number of former agency leaders and President Obama disagreed with the move on the grounds that it “undermines FDA’s scientific authority because it appeared to be a response not to scientific evidence, but to fervent advocacy of the drugs by Trump and other political figures.” (“Former FDA leaders decry emergency authorization of malaria drugs for coronavirus,” Science, April 7, 2020, https://www.sciencemag.org/news/2020/04/former-fda-leaders-decry-emergency-authorization-malaria-drugs-coronavirus)

On March 16, Dr. Raoult released the results of a small clinical involving 36 patients, 20 of whom received hydroxychloroquine (six also took azithromycin), with 16 serving as controls. (This is the study that was touted by President Trump.) The Raoult team reported that the 20 who were treated “showed a significant reduction of the viral carriage at D6-post inclusion compared to controls, and much lower average carrying duration than reported of untreated patients in the literature. Azithromycin added to hydroxychloroquine was significantly more efficient for virus elimination.” (“Hydroxychloroquine and azithromycin as a treatment of COVID-19: results of an open-label non-randomized clinical trial,” ScienceDirect, March 20, 2020, https://www.sciencedirect.com/science/article/pii/S0924857920300996?via%3Dihub)

However, on April 3, the International Society of Antimicrobial Chemotherapy (ISAC), co-publisher of the International Journal of Antimicrobial Agents, in which Raoult’s paper appeared, issued a statement which said that Raoult’s study “does not meet the Society’s expected standard, especially relating to the lack of better explanations of the inclusion criteria and the triage of patients to ensure patient safety.” Nevertheless, the ISAC defended the peer review process the study had already gone through. (“Journal Publisher Concerned over Hydroxychloroquine Study,” The Scientist, April 9, 2020, https://www.the-scientist.com/news-opinion/journal-publisher-concerned-over-hydroxychloroquine-study-67405)

Also, on April 9, Dr. Raoult released the abstract of a study his group conducted in which 1061 COVID-19 patients were treated for at least three days with the hydroxychloroquine-azithromycin combination, with a reported cure rate of 91.7% and “no cardiac toxicity.” (PDF file: https://www.mediterranee-infection.com/wp-content/uploads/2020/04/Abstract_Raoult_EarlyTrtCovid19_09042020_vD1v.pdf)

Derek Lowe, author of “In the Pipeline,” an editorially independent blog from the publishers of Science Translational Medicine, takes Raoult to task for the lack of any sort of control group in that study. (Raoult has objected to giving people the false hope that they are being treated.) But Lowe concedes that a large multinational collaboration involving researchers from Germany, Japan, Netherlands, Spain, the UK, and the US, which examined outcomes for patients taking hydroxychloroquine alone (310,350 users) or in combination with either azithromycin or amoxicillin (351,956 users), concluded that short-term (30-day) hydroxychloroquine treatment is safe. It should be noted that none of these patients had COVID-19. (“The Latest Hydroxychloroquine Data, As of April 11,” Science Translational Medicine, April 11, 2020, https://blogs.sciencemag.org/pipeline/archives/2020/04/11/the-latest-hydroxychloroquine-data-as-of-april-11)

However, trouble developed with the azithromycin combination. The authors of the study state,

“Worryingly, significant risks are identified for combination users of HCQ+AZM even in the short-term as proposed for COVID19 management, with a 15–20% increased risk of angina/chest pain and heart failure, and a two-fold risk of cardiovascular mortality in the first month of treatment.” (“Safety of hydroxychloroquine, alone and in combination with azithromycin, in light of rapid wide-spread use for COVID-19: a multinational, network cohort and self-controlled case series study,” medRxiv preprint, April 10, 2020, https://www.medrxiv.org/content/10.1101/2020.04.08.20054551v1.full.pdf)

In contrast to this robust and salutary conclusion regarding treatment with hydroxychloroquine alone, a study of 96,000 hospitalized coronavirus patients on six continents found that the 9,237 who received hydroxychloroquine had a significantly higher risk of death compared with those who did not and were also more likely to develop a type of irregular heart arrhythmia that can lead to sudden cardiac death. Derek Lowe analyzes this study and lays out the numbers on the increased death risk here: “Hydroxychloroquine: Enough Already?” Science Translational Medicine, May 22, 2020, https://blogs.sciencemag.org/pipeline/archives/2020/05/22/hydroxychloroquine-enough-already.

Lowe concludes:

“There was no evidence whatsoever of any benefit with any of these treatment regimes. There was significant evidence of harm. Here’s how it works: when something is real, you continue to see a real signal as you collect more and better data. When something is not real, it disappears. Tell me again why anyone should be advocating such treatments.”

And here is the Lancet study cited by Lowe: “Hydroxychloroquine or chloroquine with or without a macrolide for treatment of COVID-19: a multinational registry analysis,” The Lancet, May 22, 2020, https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)31180-6/fulltext.

Citing this Lancet study, WHO Director-General Tedros Adhanom Ghebreyesus announced on May 26 that WHO is temporarily suspending a trial of hydroxychloroquine in treating COVID-19, over concerns about the drug’s potential danger. WHO chief scientist Dr. Soumya Swaminathan said WHO will take another week or two to gather more data.

“We want to use hydroxychloroquine if it is safe, if it reduces mortality, reduces the length of hospitalization, without increasing the adverse events,” Swaminathan added.

(“WHO temporarily halts trial of hydroxychloroquine over safety concerns,” NBC News, May 25, 2020, https://www.nbcnews.com/news/world/who-temporarily-halts-trial-hydroxychloroquine-over-safety-concerns-n1214341)

Bottom line: Hydroxychloroquine for the treatment of COVID-19 needs continued high-quality research – and is getting it. According to New York Times Magazine, one in every five registered drug trials in the world is now testing hydroxychloroquine.

The NIH announced on May 14 that it was launching a clinical trial involving approximately 2,000 adults to evaluate whether the hydroxychloroquine together with the antibiotic azithromycin can prevent hospitalization and death from COVID-19. NIAID director Dr. Anthony Fauci stated, “Although there is anecdotal evidence that hydroxychloroquine and azithromycin may benefit people with COVID-19, we need solid data from a large randomized, controlled clinical trial to determine whether this experimental treatment is safe and can improve clinical outcomes.”

Dear Readers: I have personally interviewed several frontline physicians who are watching the use of HCQ+AZM. In two cases, they are watching use in trials. Every single doctor says the AZM combination raises risk. So the Cavuto warning on Fox News is being independently verified. Readers are encouraged to ask their own medical advisors.

HCQ by itself is controversial for COVID-19 but appropriate for malaria. I have traveled to places with high malaria risk and have taken malaria vaccine and carried treatment with me when needed.

I’ve also personally spoken with lupus victims who use HCQ and heard directly from one of them about its importance and about the fear of shortages created by Trump’s endorsement. Every one of them now sees the president’s behavior as a direct threat to their lives and families. (See “Why Hoarding of Hydroxychloroquine Needs to Stop,” “Shots,” NPR, March 23, 2020, https://www.npr.org/sections/health-shots/2020/03/23/820228658/why-hoarding-of-hydroxychloroquine-needs-to-stop)

We have also seen Brazilian president Jair Bolsonaro  endorsing chloroquine use as cases and deaths spike higher in his country. (“Brazil expands approval of chloroquine to treat COVID-19.  ” Yahoo, May 21, 2020, https://sports.yahoo.com/brazil-expands-approval-chloroquine-treat-051957756.html)

When a politician plays doctor, he had better be right or he may have deaths on his record. Trump and Bolsonaro may have put themselves at risk with that position.

A personal note. Over the years I’ve met Neil Cavuto several times and been interviewed by him on his show. He is a hard-working and exacting journalist. He overcomes a difficult personal disability every day so he can achieve the highest standards of professional action.

The issue of hydroxychloroquine use has become personal for thousands of Americans and millions of people worldwide. Medical trials may, repeat may, reveal increasingly reliable HCQ information. Meanwhile, Cavuto gets my vote. He has opted for truth and not the fake news spread by some of his Fox colleagues.

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

 


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

Sign up for our FREE Cumberland Market Commentaries

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




Cumberland Advisors Market Commentary –  Money, Taxes, Fed & COVID-19

At the following link readers may download a PDF file of the May 15th Joint Committee on Taxation analysis of federal receipts attributable to the latest stimulus bill passed by the House: https://www.jct.gov/publications.html?func=startdown&id=5260.

Market Commentary - Cumberland Advisors - Money, Taxes, Fed & COVID-19

The pressure for the Senate to act is growing daily and will only intensify. We expect something to come in the way of a new stimulus package. We think of it as $1 trillion low (the Republican bid) and $3 trillion high (the Democrat ask). Neither political party can be seen as “We won’t spend any more to help those who are in dire straits” politicians. Stay tuned. We believe the final tally for this one ends up closer to $3 trillion than to $1 trillion.

Note that the national balance sheet of the United States allows us to finance these multi-trillion-dollar deficits. We cannot do that forever, but we can do it in 2020, because we are in severe recession with nearly 40 million unemployed or furloughed and national GDP shrinking at double digits. As a result, consumption demand has collapsed, and non-government-related borrowing is down.

We shall see what “opening up” versus COVID-19 resurgence reveals in the national economy.  As this is written the number of states with an R factor above 1 is rising which means virus contagion is expanding in those states. Worsening contagion is visible in other states where a fractional R factor is approaching 1. Please remember that zero is best and above 1 is increasing danger for every person in the jurisdiction.

Meanwhile, the Federal Reserve is “all in” assisting the country, as it should be.

Side note: The Fed Board of Governors and the Regional Bank presidents and especially Chairman Jay Powell deserve the highest marks for doing their patriotic duty in conceiving and carrying out the necessary programs during this time of extreme national duress. That is my opinion. Others may disagree, and I would refer them to the WW2 model.

The Fed has more work to do. It has to reach sectors like nonprofits (they’re working on it) and go deeper into the muni space (they’re working on it). In addition, I expect the Fed to soon get to yield curve control and management so as to stabilize the forward rates in all maturities of the US Treasury securities term structure, just as it did in WW2. This is a critical next step.

When the Fed does that, it will also help stabilize the international financial system, as the total of, cross-currency, and interest rate swap, notional derivatives is now over $700 trillion and growing. The US dollar is the lynchpin for all this international financial response. And the Fed holds the power and prestige to sustain the dollar’s global role.

The Fed will avoid the trap of negative interest rates, as it should do. Negative rates are the stage 4 cancer of finance. They metastasize, developing financial tumors that worsen, and they are not easily defeated. They create finance under a failing and deflationary penalty system instead of an incentive system. Today, we continue to witness the damage from negative rates in the European and Japanese currencies. Europe cannot extract itself and has limited resilience to handle the COVID-19 shock.

At Cumberland, we have updated our five-currency comparison of negative rates and yield curves. We will send it to anyone who asks. Just email me.

My Cumberland colleague Andrew Crawford has raised the tax issue during our Cumberland morning strategy calls. He is correct to look “down the road” at what is coming. So we have developed a few bullets to summarize our thinking about taxes.

We believe that 2020 will see the lowest aggregate taxation in the US for decades. The changes in the law have already lowered many forms of taxation. They range from deferrals to lower excise taxes to changes in net operating loss carry-back to alteration in required minimum distributions, along with lots of other forms of tax relief.

Tax cuts are not just about the marginal rate. Here’s an example that may be obscure for many. I can make a section 7520 loan to my family heirs. The rate for a 20-year loan is a little over 1%; the rate is under 1% for shorter terms. The family member who borrows doesn’t have to pay back principal; just interest is required. The money can be invested by my family member, who gets to keep the benefit from the investment. The result is a transfer of value from me to my heirs without taxation until my death.  Readers: Do NOT do this without advice from your accountants and tax specialists.

So what does this example mean for strategic thinking about asset classes?

Clearly, the smart investor wants to be in front of the wave of tax-sensitive strategies that are likely to be rapidly evolving. And the investor wants to be deployed in the sectors that have liquidity support from the Fed and have price discovery in functioning markets. Avoid the dysfunctional market sectors unless you are a gambler. And avoid complex or opaque or merely translucent structures unless you are certain that you truly understand the risk.

We expect tax rates in the United States to be raised in the future. The deficit structures currently evolving are not permanently sustainable. They are temporary and needed because of the COVID-19 crisis. But they cannot last indefinitely.

Political fights over taxation are in our future, and the shape of higher taxation will evolve out of this year’s and the 2022 and 2024 election cycles. It is difficult to conceive of any path that takes tax rates lower than they are now in 2020 calendar year.

Today the highest-grade, AAA-rated, tax-free sovereign state bond is sometimes paying more than 100 basis points over its equivalent longer-term US Treasury counterpart. In the US we don’t examine the total “public sector borrowing requirement”, as is done elsewhere in the world. Thus the $4 trillion state and local government bond market has about 90,000 distinct issuers of all sizes and types. It is a fragmented market, which is why it can offer huge incentives and opportunities to those who understand it.

Today the range of investment-grade longer-term munis runs from about 2.5% yield on the highest credit end to about 5% on the lowest side of the investment grade scale. We would not touch the below investment grade, junk-level credits. It is very important to understand that the Federal Reserve is focused on keeping investment-grade markets functional. The Fed is using a pre-COVID-19 investment-grade framework that includes BBB or Baa ratings or higher.

But we do not expect the Fed to bail out market agents or market segments that were composed of junk credits before the crisis hit. That is not their job.

In our view the deployment of money in the tax-free sector is a huge bargain for investors who agree with our outlook. If you think taxes will go lower, then the case for use of a tax-free instrument is weakened. But if you think that tax rates will be higher in the future, then any current tax-free bond yield will only be even more attractive when the tax hikes occur. And history shows that any time you could buy a very high-grade tax-free instrument at a yield higher than its taxable counterpart, that was a good time to buy it and not to sell it. No one expects the tax code to be repealed.

In sum, taxes will probably go up in the future and may go up a lot. Politics will determine how much and when. Federal deficits will be huge in 2020 and 2021, but they are not sustainable indefinitely. The Fed will accommodate financial needs in the investment grades by keeping markets functioning. The Fed will not bail out junk.

Please note that this prognosis is our opinion and that nothing in the future is guaranteed. If you were Rip Van Winkle and had fallen asleep on Halloween last year, only to wake up and look around today, you would see rampant disease and death and think you were still asleep and having a nightmare. If you looked at the bond market, you would conclude that we were in a severe recession. We are. If you looked at the stock market, on the other hand, you might think nothing had happened. But it has. And if you looked at the spread between tax-free and taxable investment-grade government bonds, you would think there was a misprint, because the higher scale of tax-free makes no sense unless the tax code is going to be repealed. It won’t be.

Thank you to Andrew Crawford, who raised these matters in our discussions.

Again, to readers, email me if you want the historical charts on negative interest rates versus the US dollar.

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


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Memorial Day

“Originally, Memorial Day was known as Decoration Day, meant to honor the Union and the Confederate soldiers who died during the American Civil War. By the 1900s it had become a day to celebrate all American soldiers who died while serving in the military. It wasn’t until 1967 that it was legally named Memorial Day.” (Source: https://www.softschools.com/facts/holidays/memorial_day_facts/158/)

Memorial Day

When I served in the US Army, my first official army Memorial Day was as a duty officer in 1967 in Ludwigsburg Kasern, near Stuttgart. This was a somber time. The NATO-Warsaw Pact tension was high, and a shooting war in Southeast Asia was getting hotter, with its epicenter in Vietnam.

The world is quite different now. In our battle against COVID-19, the United States has experienced more casualties in a few months than it did over the course of the entire Vietnam War. The frontline soldiers today include insufficiently equipped healthcare workers. And German and European vaccine research is fully partnered with American firms and universities to confront and subdue a microscopic enemy.

The human spirit, in these times as in those, remains unvanquished. Frontline scenes in hospitals, first responders who keep responding despite risk, and nurses’ faces deeply marked by masks worn on long shifts are all emblematic of heroic courage, caring, and sacrifice. The smiling photos of healthcare workers whose faces are obscured by PPE reflect our insistence on remaining fully human to one another, despite COVID-19.

Also emblematic of the times are delightful and moving musical performances pieced together over great distances to become one. We have shared some of the best of these. But the truth of the hour is that, however we manage to come together, a virus has robbed us of many things, like attending a Memorial Day ceremony or playing music together in the same room or being one among many in an inspired audience, joining in applause.

We adapt and learn to be together and alone on different terms. Imagine a musician playing alone in a deserted airport that echoes with emptiness. Just one performer. Now imagine an audience, but not in the sense that we have known audiences or been a part of them – just a single person in a single chair. A performance of one for an audience of one. In the Stuttgart airport, this singular experience is happening, and it transforms and intensifies the communication that music affords, for both the performer and the listener sitting in the chair. See, for an account, “Solo for Flute, Airport Terminal and One Listener,” https://www.nytimes.com/2020/05/13/arts/music/stuttgart-airport-coronavirus-concert.html?referringSource=articleShare. Be sure to watch, embedded within the article, the video of a 3-minute solo performed by flutist Stephanie Winkler for listener Annika Fink.

For more information (in German) about these extraordinary concerts, see “1:1 Concerts – Das Konzertformat im Frühjahr 2020!” https://www.staatsoper-stuttgart.de/spielplan/1to1/?referringSource=articleShare.

Please be safe and careful during this Memorial Day weekend.

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.

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