On My Radar: No Friends on a Powder Day
March 27, 2017
by Steve Blumenthal
of CMG Capital Management Group
“First, if the bubble were to collapse on its own, would the effect on the economy be
exceedingly large?
Second, is it unlikely that the Fed could mitigate the consequences?
Third, is monetary policy the best tool to use to deflate a house-price bubble?
My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”
– Janet Yellen, September 27, 2005
(quoted in Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America,
by Danielle DiMartino Booth (Portfolio Penguin 2017)).
We touched down late last night in Salt Lake City. Susan, the boys, Brianna and me along with a
dozen bags. It’s a long-standing family tradition and let’s just say everyone is really excited. A
snowstorm just ended and my Snowbird app says 11” of fresh new snow.
There’s an old saying on the ski mountain, “there are no friends on a powder day.” Any skier who has
felt that high-speed soft feeling knows… it’s the epic natural high and it won’t last long. My good friend,
today is a powder day! I’ve got to beat the locals and catch the first tram.
Page 1, ©2017 Advisor Perspectives, Inc. All rights reserved.
This week’s post is selfishly short. “No friends,” I’ll ask forgiveness later. But I do want to share
something I believe is important as it relates to the economy, the markets and your net worth.
Bridgewater Associates is out with a piece this week entitled, “Populism: The Phenomenon.” It begins:
Populism is not well understood because, over the past several decades, it has been infrequent in
emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in
developed countries. It is one of those phenomena that comes along in a big way about once a lifetime
—like pandemics, depressions, or wars. The last time that it existed as a major force in the world was
in the 1930s, when most countries became populist. Over the last year, it has again emerged as a
major force.
To help get a sense of how the level of populist support today compares to populism in the past, we
created an index of the share of votes received by populist/anti-establishment parties or candidates in
national elections, for all the major developed countries (covering the US, UK, Japan, Germany,
France, Italy, and Spain) all the way back to 1900, weighting the countries by their population shares.
We sought to identify parties/candidates who made attacking the political/corporate establishment their
key political cause. Obviously, the exercise is inherently rough, so don’t squint too much at particular
wiggles. But the broad trends are clear. Populism has surged in recent years and is currently at its
highest level since the late 1930s (though the ideology of the populists today is much less extreme
compared to the 1930s).
I share highlights from Bridgewater’s piece with you below along with the link to the full paper. First, let
me get started with this next chart and note the parallels between the mid-1930s and today.
Page 2, ©2017 Advisor Perspectives, Inc. All rights reserved.
Source: Bridgewater Associates, LP
I appeared on Fox Business News’ “Countdown to the Closing Bell with Liz Claman” on Monday.
Ashley Webster filled in for Liz Claman. Ashley pointed to Amazon and Google and the great moves
they’ve had – a recent proof statement that all is well. We humans are herd beings. I answered… if
you do nothing else, put a 200-day moving average stop-loss on everything you own. Here’s the clip:
The Trump rally has been amazing. The equity market trend remains bullish. I’m pleased. Risk remains
elevated as we sit at the second most expensively priced market in history and the Fed is raising, not
lowering, interest rates. I’m cautious.
Take a careful look at the similarities Ray Dalio and his Bridgewater team draw between the 1930s (the
last time we sat at the peak of a long-term debt cycle) and today. The issue is debt. We’ll find a way to
the other side. Deleveraging will happen. Beautiful or ugly? We just don’t yet know what we are going
to get.
As a quick aside, I read about half of Danielle DiMartino Booth’s book, Fed Up: An Insider’s Take on
Why the Federal Reserve is Bad for America, on the plane ride to Salt Lake City last night. It is a
behind the curtain view of the culture at the Fed. Danielle was a senior analyst for former Dallas Fed
Page 3, ©2017 Advisor Perspectives, Inc. All rights reserved.
President Richard Fisher. The book is great. Buy it… and if you are holding out hope that the Fed will
save the day, DON’T. They’ve got issues, we’ve got issues.
The intro quote is from Danielle’s book. Mindful the Fed is not omniscient.
Sobering, but think of the opportunities. Grab that coffee and find your favorite chair. Today’s post is
short. Wishing you the best!
♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe
here. ♦
Included in this week’s On My Radar:
“Populism: The Phenomenon” by Bridgewater Associates
Trade Signals – Extreme Investor Optimism Yet Bull Equity Trend Remains in Place
(posted 03-15-2017)
Personal Note – Snowbird
“Populism: The Phenomenon”
By Ray Dalio, Steven Kryger, Jason Rogers and Gardner Davis
Populism is not well understood because, over the past several decades, it has been infrequent in
emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in
developed countries. It is one of those phenomena that comes along in a big way about once a lifetime
—like pandemics, depressions, or wars. The last time that it existed as a major force in the world was
in the 1930s, when most countries became populist. Over the last year, it has again emerged as a
major force.
To help get a sense of how the level of populist support today compares to populism in the past, we
created an index of the share of votes received by populist/anti-establishment parties or candidates in
national elections, for all the major developed countries (covering the US, UK, Japan, Germany,
France, Italy, and Spain) all the way back to 1900, weighting the countries by their population shares.
We sought to identify parties/candidates who made attacking the political/corporate establishment their
key political cause. Obviously, the exercise is inherently rough, so don’t squint too much at particular
wiggles. But the broad trends are clear. Populism has surged in recent years and is currently at its
highest level since the late 1930s (though the ideology of the populists today is much less extreme
compared to the 1930s).
Page 4, ©2017 Advisor Perspectives, Inc. All rights reserved.
Given the extent of it now, over the next year populism will certainly play a greater role in shaping
economic policies. In fact, we believe that populism’s role in shaping economic conditions will probably
be more powerful than classic monetary and fiscal policies (as well as a big influence on fiscal
policies). It will also be important in driving international relations. Exactly how important we can’t yet
say. We will learn a lot more over the next year or so as those populists now in office will signal how
classically populist they will be and a number of elections will determine how many more populists
enter office.
In any case, we think now is the time to brush up on our understandings of populism and what to
watch out for. While we’re not experts in politics, we wanted to share our research to understand the
phenomenon.
In this report, we describe what we see as the “archetypical populist template,” which we built out
through studying 14 past populist leaders in 10 different countries. In that way, we can show their
similarities and differences. While no two cases are identical, most cases are similar—so much so that
one might say that there is a “populist playbook.” By knowing these historical cases well, we will then
be able to compare the developments of contemporary cases with those of the past, both to better
understand the phenomenon and to better visualize how it might develop.
The Archetypical Populist Template
Page 5, ©2017 Advisor Perspectives, Inc. All rights reserved.
Populism is a political and social phenomenon that arises from the common man, typically not welleducated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those
with different values in the country and from outsiders, 3) the “establishment elites” in positions of
power, and 4) government not working effectively for them. These sentiments lead that constituency to
put strong leaders in power. Populist leaders are typically confrontational rather than collaborative and
exclusive rather than inclusive. As a result, conflicts typically occur between opposing factions (usually
the economic and socially left versus the right), both within the country and between countries. These
conflicts typically become progressively more forceful in self- reinforcing ways.
Within countries, conflicts often lead to disorder (e.g., strikes and protests) that prompt stronger
reactions and the growing pressure to more forcefully regain order by suppressing the other side.
Influencing and, in some cases, controlling the media typically becomes an important aspect of
engaging in the conflicts. In some cases, these conflicts have led to civil wars. Such conflicts have led
a number of democracies to become dictatorships to bring order to the disorder that results from these
conflicts. Between countries, conflicts typically occur because populist leaders’ natures are more
confrontational than cooperative and because conflicts with other countries help to unify support for the
leadership within their countries.
In other words, populism is a rebellion of the common man against the elites and, to some extent,
against the system. The rebellion and the conflict that comes with it occur in varying degrees.
Sometimes the system bends with it and sometimes the system breaks. Whether it bends or breaks in
response to this rebellion and conflict depends on how flexible and well established the system is. It
also seems to depend on how reasonable and respectful of the system the populists who gain power
are.
In monitoring the early-stage development of populist regimes, the most important thing to
watch is how conflict is handled—whether the opposing forces can coexist to make progress
or whether they increasingly “go to war” to block and hurt each other and cause gridlock.
Classic populist economic policies include protectionism, nationalism, increased infrastructure building,
increased military spending, greater budget deficits, and, quite often, capital controls.
In the period between the two great wars (i.e., the 1920s-30s), most major countries were swept away
by populism, and it drove world history more than any other force. The previously mentioned
sentiments by the common man put into power populist leaders in all major countries except the United
States and the UK (though we’d consider Franklin D. Roosevelt to be a quasi-populist, for reasons
described below). Disorder and conflict between the left and the right (e.g., strikes that shut down
operations, policies meant to undermine the opposition and the press, etc.) prompted democracies in
Italy, Germany, Spain, and Japan to choose dictatorships because collective/inclusive decision making
was perceived as tolerance for behaviors that undermined order, so autocratic leaders were given
dictatorial powers to gain control. In some cases (like Spain), strife between those of conflicting
ideologies led to civil war. In the US and UK, prominent populist leaders emerged as national figures
(Oswald Mosley, Father Charles Coughlin, Huey Long), though they didn’t take control from
mainstream parties.
In summary, populism is…
Page 6, ©2017 Advisor Perspectives, Inc. All rights reserved.
Power to the common man…
…Through the tactic of attacking the establishment, the elites, and the powerful…
…Brought about by wealth and opportunity gaps, xenophobia, and people being fed up with
government not working effectively, which leads to:
…The emergence of the strong leader to serve the common man and make the system run more
efficiently…
…Protectionism…
…Nationalism…
…Militarism…
…Greater conflict, and…
…Greater attempts to influence or control the media.
The table shown immediately below points out the major populist politicians from the interwar period
and what characteristics they shared:
Page 7, ©2017 Advisor Perspectives, Inc. All rights reserved.
For the most part, the populist patterns were clear (e.g., the conflicts within the countries intensified)
though they played out in somewhat different ways and to varying degrees in the different cases.
What follows is an examination of 14 of those populists listed above, in 10 countries—some 55 pages
of it. It is both too long and too short. It’s too long because 50-plus pages is more than many of you are
going to want to read. It’s too short because describing multi-decade careers of major historical figures
in an average of four pages is woefully inadequate in conveying the picture. If you think it’s too much,
we recommend that you pick the particular characters that you’re interested in and review them. To
help you do this, a table of contents is provided (note that we don’t include full profiles of a couple of
the people listed in the tables above):
This is really great research from some of the brightest minds among us. Bridgewater Associates is
the largest hedge fund manager on the planet. They manage north of $150 billion and have a history
of excellent investment performance.
I encourage you to read the report.
Page 8, ©2017 Advisor Perspectives, Inc. All rights reserved.
Trade Signals – Extreme Optimism Beginning to
Reverse, Looking For Pessimism; Equity Trend
Signals Remain Bullish
S&P 500 Index — 2,346 (3-22-2017)
Notable this week: Our bond market signals remain in “Sell,” signaling short-term bond market duration
exposure is favorable over longer-term bond maturities. The trend for fixed income remains negative
(bonds don’t do well when interest rates rise.) Both the gold signals are in a sell (however, both are
turning/nearing buy signals). The equity market trend evidence remains bullish. The extreme investor
optimism (which is short-term bearish for equities) is beginning to reverse. Let’s keep an eye out for
“extreme pessimism” – a better entry point so long as the trend remains bullish.
Click here for the charts and explanations.
Personal Note — Snowbird
“The secret to my success is I buy when everyone else is selling
and I sell when everyone else is buying.”
– The great Sir John Templeton (… a whisper of wisdom)
There is a bubble in developed world government debt; there is a bubble in public pension plans. There
is a herding of money into passive index funds, but I just don’t yet sense the irrational buying
exuberance that comes at market tops. The equity market trend is bullish and as we trend followers
love to say, “The trend is your friend.” For now anyway.
My best two cents: Have a risk-minded plan in place, stay flexible, diversified and manage your money
in a way that mindfully limits your downside risk.
I’m rushing out to the mountain as I hear my beautiful wife whispering in my ear, “be smart, you’re 55,
not 25.” OK — got it. Powder day…
We are happy and high on life and I hope this note finds you and those you love most feeling
awesome.
I’ll be in Dallas next Tuesday and Wednesday for a meeting with a dozen advisors kicked off with a chili
dinner at Mauldin’s house. John fancies himself as a bit of a chef as does his beautiful daughter,
Tiffani. It’s a chili cook-off. I’ll let you know who wins next week. My money is on Tiffani.
If you are in the Philadelphia area on April 5, stop by the Philadelphia Ritz-Carlton for the
Bloomberg/Invesco PowerShares ETF event. I have the privilege of presenting and I will be talking
Page 9, ©2017 Advisor Perspectives, Inc. All rights reserved.
about fixed income ETF trading approaches and making the point that there are ways to navigate the
ultra-low interest rate, high-risk fixed income environment we find ourselves in today.
A trip to Sonoma and San Francisco follows on April 24-26. If you are an independent advisor and
would like to learn more about the Mauldin Solutions platform and specifically how we are partnering
with a select group of advisors, shoot me a note.
No friends on a powder day. Gotta go… Wishing you a wonderful weekend!
Susan and Brianna
The Gang
If you find the On My Radar weekly research letter helpful, please tell a friend … also note the
social media links below. I often share articles and charts during the week via Twitter and LinkedIn that
I feel may be worth your time. You can follow me on Twitter @SBlumenthalCMG and on LinkedIn.
Page 10, ©2017 Advisor Perspectives, Inc. All rights reserved.
♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe
here. ♦
With kind regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its
Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve
shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and
risk management.
The objective of the letter is to provide our investment advisors clients and professional investment
managers with unique and relevant information that can be incorporated into their investment process
to enhance performance and client communication.
Click here to receive his free weekly e-letter.
Social Media Links:
CMG is committed to setting a high standard for ETF strategists. And we’re passionate about
educating advisors and investors about tactical investing. We launched CMG AdvisorCentral a year
ago to share our knowledge of tactical investing and managing a successful advisory practice.
You can sign up for weekly updates to AdvisorCentral here. If you’re looking for the CMG white paper,
“Understanding Tactical Investment Strategies,” you can find that here.
AdvisorCentral is being updated with new educational resources we look forward to sharing with you.
You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page
devoted to tactical investing.
A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend
following and investor sentiment for many years. I find that reviewing various sentiment, trend and
other historically valuable rules-based indicators each week helps me to stay balanced and disciplined
in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk
management is paramount in a long-term investment process. When to hedge, when to become more
aggressive, etc.
Page 11, ©2017 Advisor Perspectives, Inc. All rights reserved.
IMPORTANT DISCLOSURE INFORMATION
Investing involves risk. Past performance does not guarantee or indicate future results.
Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that
future performance of any specific investment or investment strategy (including the investments and/or
investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. or
any of its related entities (collectively “CMG”) will be profitable, equal any historical performance
level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the
content should be construed as an offer or solicitation for the purchase or sale of any security.
References to specific securities, investment programs or funds are for illustrative purposes only and
are not intended to be, and should not be interpreted as recommendations to purchase or sell such
securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or
recommendations of CMG (and those of other investment and non-investment professionals) as of a
specific prior date. Due to various factors, including changing market conditions, such discussion may
no longer be reflective of current recommendations or opinions. Derivatives and options strategies are
not suitable for every investor, may involve a high degree of risk, and may be appropriate investments
only for sophisticated investors who are capable of understanding and assuming the risks involved.
Moreover, you should not assume that any discussion or information contained herein serves as the
receipt of, or as a substitute for, personalized investment advice from CMG or the professional
advisors of your choosing. To the extent that a reader has any questions regarding the applicability of
any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with
the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public
accounting firm and no portion of the newsletter content should be construed as legal or accounting
advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or
unrealized, by any CMG client from any specific funds or securities. Please note: In the event that
CMG references performance results for an actual CMG portfolio, the results are reported net of
advisory fees and inclusive of dividends. The performance referenced is that as determined and/or
provided directly by the referenced funds and/or publishers, have not been independently verified, and
do not reflect the performance of any specific CMG client. CMG clients may have experienced
materially different performance based upon various factors during the corresponding time periods.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be
reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation,
he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in King of
Page 12, ©2017 Advisor Perspectives, Inc. All rights reserved.
Prussia, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above
views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor
that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure
statement discussing advisory services and fees is available upon request or via CMG’s internet web
site at www.cmgwealth.com/disclosures.
© CMG Captial Management Group
Page 13, ©2017 Advisor Perspectives, Inc. All rights reserved.