Cumberland Advisors Market Commentary – Paul Schulte: Q & A, Covid, China-US, AI, 5G, 2 Books

With honor and gratitude, we wish to introduce Paul Schulte, the founder of Singapore-based Schulte Research. He has three decades in applied financial research and has worked for all three branches of the US government, including the NSC at the White House. He teaches worldwide, has written five books, and a whole lot more. His expertise in finance and technology are sought globally by serious investing institutions. I read nearly everything he writes. We thank Paul for agreeing to answer a few questions in this Q&A. But first, let me recommend two of his books; both are in my library.

His latest co-authored book is The Race for 5G Supremacy: Why China is Surging, Where Millennials Struggle & How America Can Prevail (2020). In this book, Paul and his coauthor, Austin Groves, after an analysis of what is propelling China forward and what is holding America back, propose parallel “Apollo Programs” for America—one focused on helping America to catch up with China and even surpass it technologically, and the other focused on generational issues of millennials, a generation key to American success, but one “bogged down by a host of under-appreciated and intertwined issues which cause anxiety and alienation and lead to massive losses in workplace productivity.” Readers can find the book on Amazon: https://www.amazon.com/dp/B0894345YG/.

Here’s a quote from page 63: “The charts in Sections 5.1 and 5.2 show the phenomenon that is Huawei. It has emerged as the predominant global player in 5G at a time when the US does not have a single major player in this area. Its total revenues have exceeded US$100 billion. It operates in more than 100 countries. It is the dominant player in Africa and Asia, and it has overtaken Apple in global market share. ATT and Verizon are trying to get up to speed but are at least 1–2 years behind Huawei.” This book is a “must” for anyone interested in investing in the technology and communications sectors. Paul’s thinking is global. His views are all supported with curated expertise.

His previous co-authored book is AI & Quantum Computing for Finance & Insurance: Fortunes And Challenges For China And America (2019), available on Amazon at this link: https://www.amazon.com/dp/B07R8CL879/. Paul and his coauthor, David Kuo Cheun Lee, equip readers with the technological literacy to assess and map the future of AI in the financial and banking industries. We will quote from page 41. “Alibaba has expanded its e-commerce business Taobao and Tmall to Finance (Ants Financial) and Tech Service Provider (Alibaba Cloud). Figure 2.8 shows the fullest AI ecosystem that is unmatched by any other, and it has achieved all these innovations while being the most profitable of any tech companies. Alibaba will produce its own AI chip as well as develop quantum processors expanding into a semiconductor business 2019Q2. AliNPU, the new AY chip, had the potential to support technologies used in autonomous driving, smart cities, and smart logistics and driven by its R&D arm, Damo Academy. Pingtouge, a new semiconductor subsidiary will focus on customized AI chips and embedded processors.”

Dear readers who are serious about the worldwide tech sector and how to invest in it, we recommend you buy and read both books now.


Here’s the Q&A with Paul. We thank him for taking the time to answer these questions.

Q1. In the US we have a COVID-19 disaster. Many Americans do not understand how the Chinese applied technology to rapidly address COVID outbreaks. Can you describe the reaction function and techniques used recently when the cluster of new cases erupted in the Beijing food market? We want our readers to learn what a high-tech reaction function can look like so they can compare it to what they see happening in the US.

Schulte: Asia learned the hard way to deal with viruses when SARS struck in Hong Kong in 2003. SARS had a mortality rate of 50% (and it hit hard in Beijing). So, most governments (Taiwan, Singapore, HK, China, Korea) had established pandemic response teams to deal with COVID when it hit. China had one of the most draconian responses in human history. It made more than 500 million people stay home for 56 days. This was to [prevent] the virus from spreading, i.e., getting the R0 way below 1. (As a result, China is now back to normal). One person (the same person) was allowed to leave the house to buy groceries. Drone food deliveries became common. Autonomous vehicles were used to sterilise streets. 5G was used to transmit remote thoracic scans to hospitals. China built one mass hospital in Wuhan in 6 days from pre fab equipment. Two weeks ago, there was an outbreak in a vegetable market, and China closed locked down two districts of Beijing. (These districts have about 2 million people each.) It conducted 300,000 tests in 48 hours. Each phone in China (and here in Singapore) has an app to show where you have been to accelerate contact tracing and to alert people if they have been exposed to the virus. China is doing exactly what Dr. Fauci says over and over. Test. Discover. Isolate. Quarantine if necessary. Retest, Discover. Repeat.

Q2. The intensity of “blame game” rhetoric is growing in both the US and China. Some characterize the widening divide as a “cold war.” How do you see the evolution of this competition? Can the US successfully “catch up” in the 5G race? What happens after the November elections in America?

Schulte: I worked in the NSC in the 1980s in Reagan II. I see the same dynamics at play now in the conflict with China as I saw in the Cold War with the USSR. Hegemonic powers who claim a superior way of life need to hold on to transportation, roads, seaways, telecoms, space, mail (now email), and money in order to maintain political and economic control. This is the nature of a hegemon. 5G rollout by China (with no rollout in the US at all) poses a threat to the US as it can disrupt the monopoly on telecom that the US had with 4G. So, it makes sense for the US to try to slow China down in order to buy time to catch up. There really is no “alternative” to 5G at the moment, as it is a system which is already “baked in the cake.” Why? The US military is loath to give up spectrum to the private sector. Also, ATT and Verizon might have dropped the ball here. But China has already rolled out 5G in hundreds of cities and is doing fascinating things in melding finance to property. Banking and insurance are now mixed with commercial, residential and industrial property to create entirely new industries. The US should pay attention.

Q3. Hong Kong is on the minds of global financial managers. Will there be a capital flight? A brain drain? Is the “one country, two systems” model permanently dead? Please give us your views from the unencumbered Asian financial center of Singapore.

Schulte: I lived in Hong Kong a total of 18 years before decamping to Singapore two years ago. The center of wealth in America is New York, and it revolves around financial transactions. The GFC created animosity toward the elites on Wall Street. The center of wealth in Hong Kong is the Peak — the TOP of the island occupied by the property tycoons. These billionaire tycoons have had a cartel for decades and have literally funded the government through highly controlled land sales for decades. This has created THE most expensive city in the world while the salary for a college graduate from a TOP Hong Kong university is about $21,000 Hong Kong dollars a month. This is USD $2,000 per month after tax. The average rent for a SMALL one bedroom apartment in Hong Kong is $1,500–$2000 per month. So, you either live in very cramped conditions with your family or get a second job just to feed yourself. Incidentally, while the housing price index has gone up four times since 2008, these salaries are virtually unchanged. So, the standard of living has collapsed for most Hong Kong people.

Somehow, people do not blame inept HK government policies which wholly ignored these problems festering right in front of everyone’s eyes. They do not blame property tycoons who made billions in HK property and then invested their profits overseas. They blame China. It’s not surprising, as blaming a foreign power is easier than taking an honest look at one’s own shortcomings. There’s a lot of that going around now.

Watch this space, though. China has implemented the new national security law to create a “Special Branch” similar to what the British had for decades. (It was disclosed that the US Congress — presumably through the CIA — had provided $2 million for ‘secure communications’ for the protesters). So, this is the kind of thing that China wants to go after. Imagine if it was discovered that the PLA had provided $2 million in funds to help Antifa protesters in Atlanta or Raleigh? The US would flip its lid.

In the same breath, China has reinforced its support for the Hong Kong Stock Exchange and more Chinese listings. Hong Kong will remain a dollar funding center full of very unhappy people. I presume many will leave to find a better way of life. Hong Kong people are some of the toughest and hardest working people I have ever met. Any country would be lucky to get them.

Q4. The US has two aircraft carrier groups on maneuvers in the South China Sea. The regional tensions are rising, and many countries are involved. Do you fear a cold war risk becoming a “hot war” event? Even with leaders trying to avoid shooting war, accidents happen. And some players, like North Korea, are dangerous and unpredictable. Please give us your geopolitical risk assessment.

Schulte: I’m very skeptical that there will be any violence between US and Chinese naval vessels. It’s the height of the election season in the US, and having a war is bad electoral strategy. However, I do believe that either party who gains power in 2021 will carry on an aggressive hegemonic game with China. Even if Biden were to reverse course, which is unlikely, it takes a few years for the Pentagon and company to reverse course. So, we should expect things to heat up in 2021 to 2022. 2023–2024 will likely see them get to the peace table for talks.

So, the US has FINALLY pivoted to Asia after threatening to do so for many years. It is solidifying its alliances with Japan, Korea, Singapore, Australia, and (tentatively) India. This is basically surrounding China. In its corner, China has its own territories, Hong Kong, Pakistan, Philippines (kind of), and the Spratly Islands. Both Trump and Xi get poor marks for soft power, but I strongly believe a new non-aligned movement is being created just like the one in the 1960s. Back then, its center was Jakarta. Now it is Beijing. The question is, non-aligned with whom?

Q5. This question is personal. On visiting Singapore, I experienced a long walk around the world-famous Bonsai Garden. And, of course, I toured the Orchid Garden before a lovely lunch in the glass-enclosed restaurant at the bottom of the hill. In the Arctic, the temperature is rising three times faster than it is on the equator. But accelerating climate change and the damage from it is frightening worldwide. How do you experience it on the equator? And for personal information, how are those gardens faring today?

Schulte: Climate change is having a particularly devastating effect on poor countries who cannot afford state-of-the-art systems for flood control, landslides, avalanches, and flash flooding. Singapore’s temperature is the same every day — 77 degrees at night and 96 degrees at day. We have had very heavy rains this year, but the superb quality of flood control and water runoff means there are rarely any floods. If you have the foresight and money, climate change can be kept at bay. Poorer countries like the Philippines, Bangladesh, and those in the Caribbean are being persistently devastated. (And yes — the bonsai and orchids gardens are still there. Come and visit.)

Q6. What’s the likely outcome for the Singapore elections?

Schulte: The PAP is likely to sweep into power again with more than 80 seats in the 89-member Parliament. Singaporeans are often cynical about the PAP; but when you nail them down, they are very proud of what they have achieved. There is inequality. But there is no crime. No guns. No widespread drug addiction. No religious strife or sectarian violence. No flooding or frequent mudslides. There is strict rule of law and a highly responsive civil service which is squeaky clean. And the response to COVID has been quite good [after] a wobbly start. And 80% of people live in decent crime-free and drug-free public housing.
I was having a dinner party with three people from the World Economic Forum a few months ago, and one (American) person said, “I think this is what is known as governance. America should try it.” There is grousing on the fringes about a lack of entrepreneurship, too much rote education, a lack of planning for what Singapore wants to become. But these are high quality problems which do not cause people to switch parties. I left Hong Kong two years ago because a blind person could see that it was a seething cauldron. People here have trust and confidence in their government and in each other. It’s a good example of consent of the governed.


Paul, we thank you for sharing these views with our readers. Please be safe and careful. When the opportunity presents itself, lunch in Singapore or New York or on a fishing trip to Maine is on the list for the future.

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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Barron’s – The Unemployment Rate Is “Grossly” Understated. Here’s Why

The Unemployment Rate Is “Grossly” Understated. Here’s Why.

Excerpt from Barron’s – July 02, 2020

Cumberland Advisors John Mousseau

A portion of John Mousseau, CFA’s commentary, The Muni Selloff That Was, was incorporated into Barron’s editorial piece, “The Unemployment Rate Is ‘Grossly’ Understated. Here’s Why.

July 1: The infrastructure bill being considered by Congress contains two pluses for the muni market. The first is a resumption of the Build America Bonds program. This program enjoyed great success during the last recession, with the issuance program lasting from April 2009 through December 2010. It allowed issuers to issue bonds in the taxable bond market with a federal subsidy on the interest payments. The issues had to be for new projects, which was the stimulus part of the program. The resumed program may not have the same 35% subsidy that the original had, but rather may hard-code the subsidy at a lower level. Sequestrations at the federal level caused that original subsidy to go from 35% down to the mid-20% levels over time.

Another positive aspect in the infrastructure program is the return of advance refundings in the tax-free bond market. This practice was removed by the 2017 tax bill, but had been a way for municipalities to save money by refunding older higher-coupon bonds to their first call date. Anything that allows municipalities to lower their cost of future funding is a very big positive, in our opinion, as we move forward from the pandemic.

John R. Mousseau

Read the full article at Barron’s:  https://www.barrons.com/articles/the-unemployment-rate-for-june-is-grossly-understated-51593732640


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Warren Buffett doesn’t need the Fed’s help. But he’s getting it anyway

Warren Buffett doesn’t need the Fed’s help. But he’s getting it anyway

 

Cumberland-Advisors-David-Kotok-In-The-News

Excerpts below.

By Matt Egan, CNN Business
Jun 29, 2020

It’s not that Berkshire needs or requested assistance from the Fed — nor that the relatively tiny bond purchases will move the needle for Buffett’s massive company. Other blue-chip names including Walmart, Boeing, ExxonMobil and Coca-Cola also had their bonds bought by the Fed facility, which launched this month. CNN owner AT&T is also on the list.

Still, the fact that Buffett’s Berkshire, which is sitting on $43 billion in cash, now has some of its bonds owned by the Fed program underscores just how far the central bank is going to prop up the capital markets. And it raises concerns among some that the Fed experiment is distorting the normal functioning of markets.

The goal of the program is not to bail out specific companies but to make sure creditworthy firms have access to capital. Without it, a tidal wave of bankruptcies would happen all at once, potentially crashing the economy into a depression.

“This is a very clever tool,” David Kotok, chairman and chief investment officer at Cumberland Advisors, told CNN Business. “The Fed wants to give incentives and inducements to Berkshire, Verizon, Apple and the rest to become more economically active.”

Still, Kotok fears this intervention will distort the functioning of the capital markets.

“The Fed is now in the business of picking corporate winners and therefore by definition also losers,” Kotok told CNN Business. “The corporate winners have the market perception that the wind is at their back, otherwise why would the Fed buy our bonds?”

That perception in the marketplace, Kotok said, will give the winners additional financial firepower in the form of cheaper borrowing costs. And by contrast, companies that didn’t make the cut for the Fed’s list will find it relatively harder to borrow.

“The divide between the winners and losers has now widened,” Kotok said.

Read the full article at KTEN’s website: https://www.kten.com/story/42305072/warren-buffett-doesnt-need-the-feds-help-but-hes-getting-it-anyway


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 –  Forrest Gump Responses

We’ve been compiling responses to our commentary on Forrest Gump’s advice. For those who missed it, here’s the link: https://www.cumber.com/cumberland-advisors-commentary-forrest-gumps-advice/. Now some quotes from readers.

Bruce wrote:

“Thanks for your Forrest Gump moment. Your most revealing sentence in all of this missive is ‘people are now required to take full responsibility for their own personal safety’, seems like adults should live by that sound advice in everyday life, not just during a pandemic. I assume from that statement you believe the ‘state’ is responsible. This makes me believe you would be more at home in china or russia, so why are you ‘tolerating’ the american way of life in florida. ‘stupid is as stupid does’ just shows how our state and federal governments have for years ‘dumbed down’ the us educational system so everybody graduates, no one fails. If you really want adults to be responsible for their own safety write articles about our failing educational system from grade school thru high school, but that’s ‘government responsibility’!”

Peter Gold is vice-chairman of the Global Interdependence Center (GIC) and has a distinguished career in the Philadelphia region in both law and education. He calls things as he sees them. He wrote:

“After speaking with the people who I was told are leading the contact tracing efforts in Philadelphia and Pennsylvania I am convinced that both Democrat and Republican leaders by their inactions or mistakes have de facto united on the calculation, whether intentionally or not, that 10,000 to 20,000 deaths a month nationally in the next few months is acceptable. A good percentage of these deaths, maybe even the majority, could be avoided by an effective contact-tracing effort. As a Philadelphian I ask, where are the City Council Hearings? Where is the Pennsylvania legislature? In my opinion this default to ineffective efforts to try to trace may be a criminal activity. As an attorney it is also my view that, while it would be a ‘novel’ case for sure, a cause of action might exist in civil liability claims for money and punitive damages that may not be protected by sovereign immunity. Government(s) have a duty to protect; there is a tried and true method to do that. Government(s) have failed in that duty, and as a direct consequence, hundreds, if not thousands, have and will die or become sick. To me, it’s like the government knows that a dam is breaking and won’t or can’t take measures to either fix it or move the population which will be decimated by its breach, even though measures are doable. Our population and our economy need immediate action. Who is the people’s champion on this life-and-death issue?”

Peter and his brother Jeffrey Gold sent the following note. Dr. Jeffrey Gold is Chancellor of the University of Nebraska Medical Center, a major American institution that is currently intensively involved in research on COVID-19. Readers with time may wish to learn more about UNMC.

The two Gold brothers wrote:

“David, my brother Dr. Jeffrey Gold and I would like to jointly reply to your … commentary of yesterday. We welcome further discussion. This is our joint response.

“… you set out the case for masks and social distancing. In addition to those cited by you, there are other reputable reports and studies which show that in the U.S., masks and social distancing can save between 15,000 to 30,000 lives in the next few months alone.

“Our response is our clear and loud call to further action by more of us. Respectfully, we need to more loudly talk about the personal tolls and stories of some of those and their families who are affected by the virus. We need to bring it home. It is not just something seen on our favorite screens. Knowing the real life pain and agony of some whose illness could have been avoided is very powerful, is honest, and might move the meter. To many, the virus is invisible and will only hurt those who are in nursing homes, health care workers, or other ‘elderly.’

“As you know, David, nothing can be further from reality. If people don’t know someone who is or was sick or died then they sure know what has happened to the economy of the US and the world. They are or will be directly affected by that. But, regrettably, the numbers, statistics and reports won’t materially move the meter in getting an indifferent, untrusting, or recalcitrant group to change behaviors and use masks as a tool to combat the enemy. Rational arguments are important, but observing and feeling personal anguish is also convincing as part of a reality education process.

“Please let us share these unexaggerated true experiences with a hope that they will be retold. An emergency room nurse here in Arizona tells about a woman in her sixties whose husband took her to COVID emergency at one of the hospitals. When admitted, she was separated from her loved one, spent several days trying to breathe and contemplating her death — in fear of her death. Eventually she was put on a ventilator and died. She did this ALONE with no family and loved one present, and her husband and family could not say goodbye.

“A Philadelphian shared that he knows someone who was very sick with COVID and who was put on a ventilator for 5 days— again all alone — and was fortunate to come off the ventilator and was eventually discharged. However, his respiratory system was damaged by the virus and ventilator and he now requires respiratory therapy, has not regained even enough strength to interact with his kids for more than minutes at a time.

“An elderly women drove through the night to get her feverish and breathless husband of sixty-six years to the physicians at a rural hospital, only to realize that he had quietly passed away during the long drive. She was also ill, admitted to the hospital, and died several days later, alone.

“A middle-aged man in hospice care, with a strong desire to join his family just once more and walk his daughter down the aisle, lost his ability to cling to life after the wedding was postponed due to the pandemic. The very same family could not be with him in his last days or gather together to share their grief.

“A young emergency medicine physician practicing in the New York City pandemic epicenter served in the very front lines of care and caring. The magnitude of the endless patients, the tragedy of the seemingly endless loss of life, and the sense of helplessness caused her to take her own life.

“We respectfully ask everyone to listen to and retell the personal stories. Listen to the expressions of human pain this COVID-19 is causing and understand that wearing a mask—you , your family members, co-workers, social colleagues—is a relatively easy and very powerful barrier to the disease and spreading it. In this world of uncertainty where individually we are mostly powerless to change and influence many things, wearing a mask is a big exception. It is certain that if more of our population took personal responsibility and wore masks, we would dramatically cut the spreading and stop the pain for many.”

Kevin added politics:

“Thanks for sending this out. While I did not vote for Trump in the last election, I *had* become a supporter over the years based on seeing someone run the country more like a business than a social entity. The strength of the economy had brought me beyond the day to day annoyance of his often socially incorrect communications. I was thinking he was doing as good as anyone could in managing this pandemic, with one big exception. He should be pushing for mask wearing and setting an example. Because he has not taken this scientifically proven measure to limit the pandemic, Trump has lost my vote.”

R.R. wrote:

“Really disappointed in your view and opinion about Trump. Interesting that you only share these articles about Pence. How about the thousands of protesters and thugs that are out there like sardines, likely spreading the virus, and the radical Left mayors and governors allowing it… never mind allowing the destruction and stealing of anyone’s property! I suppose you support the radical left path forward, socialism and what it will do to the lives that we worked hard to build.”

Many thanks to the folks who responded. There were dozens of replies, which I tried to answer with at least a thank you.

Now, here’s mine.

There is absolutely no doubt that wearing of masks and social distancing coupled with contact tracing are a robust way to reduce infections. Why do we make these behaviors a political statement? Why? The virus doesn’t know if you are a Democrat or a Republican; the virus doesn’t care if you like Biden or Trump.

But the 330 million people of the United States are watching what was going to be a “flattening of the curve” with diminishing waves (second and third each smaller than the first) become a spiking of the curve with a continuous expansion.

“I think this is more like a forest fire,” said Dr. Michael Osterholm, the director for the Center of Infectious Disease Research and Policy at the University of Minnesota, on NBC’s “Meet the Press.” He concluded: “I don’t think this is going to slow down. I’m not sure the influenza analogy applies anymore” – referring to a report he and colleagues authored in April, using influenza pandemics as a model for understanding the coronavirus. “I think that wherever there’s wood to burn, this fire is going to burn it.” He added, “I don’t think we’re going to see one, two, and three waves — I think we’re just going to see one very difficult forest fire of cases.” He also called for a more unified national structure for dealing with the virus, rather than a patchwork of states using various strategies and reopening plans. “We have not really gotten the message across to the public yet that this is a very serious issue,” he said. “We can’t shut down the economy, but we can’t suddenly say we’re done with it.”

We cannot shut the economy for three years. Most agree on that. We also cannot pretend COVID-19 is over. Most agree on that. National, frequent, accurate testing for the disease and for antibodies is critical and needed. Most agree on that.

So, if most agree on these basic elements, why don’t we have them?

Investors, do you want the stock market to go up? Insist that we have effective measures in place to manage and put out the forest fire of infection. Entrepreneurs, do you want to reopen your businesses? Insist that we have them. Nonprofits, do you want to have donors and to offer community services? Insist that we have them. Religious organizations, do you want to hold services and open schools? Insist that we have them. Labor unions and non-union workers, do you want jobs and income? Insist that we have them.

What are these critical elements of effective response? Universal and accurate disease testing, mask-wearing, contact tracing, antibody testing, and social distancing.

Insist that we have them.

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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Wall Street’s road warriors have spent the past three months grounded. How’s that working out?

Excerpt below…

Wall Street’s road warriors have spent the past three months grounded. How’s that working out?

John Mauldin misses the little thrill of being recognized in an airport, while Barry Ritholtz muses on having staggered shifts in his office. What else did ‘lockdown’ mean to finance’s heavyweights?

June 13, 2020 By Andrea Riquier

John Mousseau before the lockdown and during
John Mousseau before the lockdown and during

MarketWatch checked in with a few high-profile financial road warriors to see how they’ve handled having to hunker down, their overnight bags gathering dust. We asked what, if any, shifts in the way financial services operate might be here to stay when things get “back to normal,” if there is such a thing.

John Mousseau is president and CEO of Sarasota, Fla.-based Cumberland Advisors, a fee-based investment advisory firm with about $3 billion in assets. Before the lockdown, Mousseau regularly traveled about one-third of the time.

From his home in Sarasota to Cumberland’s office is about a two-minute drive, and Mousseau says he felt safer creating a “command center” for himself in the office, where he was all alone with multiple computer screens, televisions and phones.

He’s a bit rueful about being stuck at home during Lent, however. “That’s when I try to do something nice for someone every day, you know, just ‘Can I give you a hand with that?’ That fell by the wayside this year. The sad part is unless you’re wearing a mask, that’s something you won’t do in the new normal. To the extent there was any chivalry at all, it’s going to take a big hit.”

MarketWatch: What’s it been like being homebound?

John Mousseau: There’s an upside to this: the solitariness isn’t that bad because I spend most of the day on the phone. There’s never any isolation. There’s been good aspects: you’re not out doing entertaining, being entertained, not eating donuts that people bring in. I’ve been swimming, working out, and while the gym was closed, I would go home and go on a run. I’m down 18 pounds.

The interview continues at MarketWatch’s website: www.marketwatch.com


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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.




Instant View: Wall Street backslides on economic gloom, uptick in virus cases

Instant View: Wall Street backslides on economic gloom, uptick in virus cases

Reuters – June 12, 2020

Cumberland-Advisors-David-Kotok-In-The-News

Excerpt below:

NEW YORK (Reuters) – Wall Street indexes nosedived on Thursday, on track for their worst days since early in the coronavirus pandemic as investors reassessed a stocks resurgence after the Fed issued a gloomy growth forecast and infections showed signs of upswing.

DAVID R KOTOK, CHAIRMAN AND CHIEF INVESTMENT OFFICER, CUMBERLAND ADVISORS, FLORIDA:

“Everything changed with COVID fear. It provides nerve-wracking violent moves which can induce more fear or provide trading opportunities depending on the investor and their capability and discipline. I haven’t deployed any cash in this selloff yet. That could change at any time. I raised cash into the rally. At this point I wish I’d raised more. I sold stocks and raised cash.

“It is a combination of unknown economics and a very sobering and accurate assessment by the Fed and Powell and a fear of a second wave, which is a realistic and genuine fear.

“Do we have a 5-8pct correction within a bull market that started with the bottom on March 23? Yes (we) might. Does the decline get more serious? It might. I don’t think I can guess which it is. That’s why I haven’t committed any cash. I don’t want to catch a falling knife.”

Read the full article at www.reuters.com: https://www.reuters.com/article/us-usa-markets-instantview/instant-view-wall-street-backslides-on-economic-gloom-uptick-in-virus-cases-idUSKBN23I2WM?il=0

 

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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 Radio Interview: David Kotok – Health Care Will Be 20% of This Country’s GDP

Bloomberg Radio Interview: David Kotok – Health Care Will Be 20% of This Country’s GDP

June 11, 2020 – Running time 07:32

David Kotok, Chairman & Chief Investment Officer at Cumberland Advisors, on credit spreads and the Fed. Hosted by Vonnie Quinn and Paul Sweeney.

David Kotok Interview

LISTEN HERE: https://www.bloomberg.com/news/audio/2020-06-11/health-care-will-be-20-of-this-country-s-gdp-kotok-radio

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 July 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: https://www.stitcher.com/podcast/bloomberg/masters-in-business/e/48339521

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More “Masters in Business” podcasts here:
http://www.bloomberg.com/podcasts/masters-in-business/




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


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 – 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 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.