Subject: Investment Outlook-Steve Blumenthal The Global...

Subject: Investment Outlook-Steve Blumenthal

The Global Economies, Bonds,Dollar, Gold, Commodities, and Equities.

As we head into the final quarter of 2024, let’s examine the big picture—what I believe are the critical issues impacting the markets.

Global Economies:

• Rising power (China) is challenging the existing power (U.S.). The entire global economic manufacturing framework is shifting from partnership to protectionism. Reshoring/friend-shoring of goods production net-net increases inflationary pressures vs. the deflationary benefits we experienced over the last thirty years.
• It’s highly probable that the developed world authorities (central banks and governments) will continue to pursue/expand QE policies (money printing) in response to debt challenges. We expect the U.S. economy will experience several waves of inflation. Wave one is behind us. The timing and depth of wave two will depend on the pace and size of government responses.
• China fired a new QE cannon this week.
• Janet Yellen and the Treasury have been spending $2 trillion a year more than they are taking in from tax receipts by issuing new Treasury Bills. That money is new money in the system. A backdoor QE if you will.
• The Fed cut interest rates 50 bps on Sept 18. Betting markets anticipate they will cut rates by another 100 bps by year-end.
• The economic challenges differ from country to country, but overall, the world economies are slowing. We are seeing the beginning of the next wave of economic stimulation (QE), which we believe will lead to wave two of inflation sometime in late 2025 or 2026.
• Sadly, we see little political will to reverse this behavior. The world is moving from a long secular period of disinflation to inflation/stagflation.
• Inflation is too much money chasing too few goods. Reckless money printing is the root cause. Focus on the world government’s policy response, especially the largest economies.
• World War III, unfortunately, is a genuine risk.
• We have been and continue to expect a recession. Governments will provide the most significant injections of new sugar during recessions.

Bonds

• Our outlook is for declining interest rates in the short term, with a target on the 10-year Treasury yield of 3% before wave two of inflation begins. It is currently yielding 3.77%. This presents an opportunity to trade out long-duration bonds, refinance higher-yielding mortgages, etc. As we move into inflation wave number two, favor shorter-duration bonds whose yields increase at rates rise. We believe the next wave of inflation will be worse than last.
• Several leading recession indicators signal a slowing economy. Recessions typically begin when the yield curve normalizes, when long-term interest rates are higher than short-term interest rates (aka, when the inverted yield curve re-inverts). That has just happened.
• As mentioned, China and the U.S. have begun providing stimulus.
• The size of the debt and entitlement promises is problematic and worsening. We believe we are on a path toward a great restructuring or, as our friend John Mauldin calls it, the “Great Reset.”
• Due to our current starting conditions, we believe the next wave of inflation will be bigger than the last. If so, we would not be surprised to see the 10-year Treasury yield reach 8% or higher.
• The secular shift in bonds is from a long period of declining interest rates to rising interest rates. The bottom was in 2020 when the 10-year Treasury yield was 0.35%.

Dollar

• All of the above leads us to believe the dollar is peaking and will begin a long-term secular decline. Government mismanagement and policy response are the root causes.

Gold, Commodities, and Equities

• Gold is in a long-term secular bull market – likely to continue through the remainder of the decade. Given the challenges the developed world faces, it is a favorable asset class as described above. Accumulate gold on price pullbacks. The Weekly MACD indicator we share in Trade Signals each week is our favorite entry timing tool.
• Commodities have been out of favor for a long time. The macroeconomic backdrop we foresee favors the beginning of a secular bull market in commodities—areas such as farmland, oil, industrial minerals, uranium, and agriculture.
• Equities: Value stocks are generally reasonably priced, while growth stocks are extremely overvalued. We particularly like high and growing dividend stocks. Overall, we favor a shift to value from growth.

We want to add another categoryto this post: Tangible assets

• Real estate (multi-family and single-family), land, sports franchises, well-managed business franchises, and cryptocurrencies.

Conclusion

• We believe the goal for the period ahead is to beat inflation.
• We don’t believe a 4% yielding 10-year fixed-rate bond will provide an efficient return for portfolios, especially if rates increase to the high single digits as we anticipate. Such bonds will lose to inflation and price declines. After all, who wants your 4% yielding bond if they can get 8%? You’ll have to either hold to maturity or sell at a discount.
• There are certainly assets that can perform. It is a question of portfolio positioning. We don’t believe the popular 60% stocks and 40% bonds buy-and-hold portfolio is the correct approach. It’s excellent when valuations are attractively priced, and yields are higher. That day will present again. In our view, this is not the current state.