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Joseph Y. Calhoun

Joseph Y. Calhoun

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Articles by Joseph Y. Calhoun

Monthly Macro Monitor: Market Indicators Review

July 19, 2019

The markets we use to monitor the economy (and those that influence it, which amounts to the same thing) have been tracking an economic slowdown since the 4th quarter of last year. That’s when interest rates, real and nominal, long term and short term, started to decline, credit spreads started to widen and the copper to gold ratio started to fall. Those are all classic market signals of an economic slowdown. Some of those have moderated since the beginning of the year though and today we seem to be standing at a crossroad. If the economy continues to slow, it won’t be long before recession becomes inevitable. As I said in the update earlier this week though, we aren’t quite there yet.
We first started to notice problems in markets over a year ago. Jeff Snider noticed disruptions in money

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Monthly Macro Monitor: We’re Not There Yet

July 17, 2019

It’s been a slow turnin’
From the inside out
A slow turnin’
But you come about
 
Slow learnin’
But you learn to sway
A slow turnin’ baby
Not fade away
 
Now I’m in my car
I got the radio on
I’m yellin’ at the kids in the back
‘Cause they’re bangin’ like Charlie Watts
 
Slow Turning by John Hiatt
 
“How did you go bankrupt?” Bill asked.
“Two ways”, Mike said. “Gradually and then suddenly.”
 
The Sun Also Rises, By Ernest Hemingway

 
I first wrote about the current economic slowdown a year ago and Jeff Snider actually started seeing signs of slowdown in the Eurodollar market as early as May 2018. So, the slowdown we’re in now certainly isn’t a surprise here at Alhambra. I think though that we often forget how long these things take to develop. When we look back at past recessions it seems

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Monthly Macro Monitor: Economic Reports

May 31, 2019

Is recession coming? Well, yeah, of course it is, but whether it is now, six months from now or 2 years from now or even longer is impossible to say right now. Our Jeff Snider has been dutifully documenting all the negativity reflected in the bond and money markets and he is certainly right that things are not moving in the right direction. But moving in the wrong direction, even deeply, as we discovered in 2015/16, doesn’t necessarily mean recession. This slowdown – and that’s what it is right now – like all slowdowns we go through in a business cycle, puts the economy in greater danger of recession. It is a lot easier for growth to turn negative when you are growing at 1% than it is when you are growing at 3%. So, yes, we are definitely vulnerable right now and seemingly more so with

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Monthly Macro Monitor: The Tempest

May 13, 2019

The Trump administration raised tariffs last week from 10% to 25% on $200 billion worth of Chinese goods and are considering tariffs on another $300 billion of Chinese goods. The Chinese retaliated this morning, raising tariffs to 25% from 5% and 10% on various goods totaling $60 billion. Obviously, the trade negotiations are not going well. Stock markets around the world have fallen as a result, fears of recession rising again as institutional memories of Smoot-Hawley trigger investors’ flight response.
Stocks are not one of the market indicators we follow to inform us about the current state of the economy. The main reason for that is that stocks and economic growth are not highly correlated except over the very long term. The other reason is that stock investors tend to be more

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Monthly Macro Chart Review: April 2019

April 7, 2019

The economic data reported over the last month managed to confirm both that the economy is slowing and that there seems little reason to fear recession at this point. The slowdown is mostly a manufacturing affair – and some of that is actually a fracking slowdown – but consumption has also slowed. On a more positive note, housing seems to have found its footing with lower rates and employment is still fairly robust. The US economic growth rate in this cycle has been disappointing and the forces that have made that so haven’t changed. The short burst of higher growth last year has faded – as we expected – and in the short term I don’t see much reason to expect another burst. There are, however, some positive signs about the future that ought not be overlooked.
Economic Reports
Economic

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Monthly Macro Monitor: Well Worried

March 26, 2019

Don’t waste your time worrying about things that are well worried.

Well worried. One of the best turns of phrase I’ve ever heard in this business that has more than its fair share of adages and idioms. It is also one of the first – and best – lessons I learned from my original mentor in this business. The things you see in the headlines, the things everyone is already worried about, aren’t usually worth fretting over. The market may not be perfectly efficient but when it hits the front page of the local newspaper – or saturates the modern day equivalents, Twitter and Facebook – it is already over and doesn’t deserve your attention.
In case you haven’t heard – and I don’t know how you could have possibly avoided it – the yield curve inverted last week. Or at least some yield curves

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Monthly Macro Chart Review – March

March 7, 2019

We’re changing the format on our Macro updates, breaking the report into two parts. This is part one, a review of the data released the previous month with charts to highlight the ones we deem important. We’ll post another one next week that will be more commentary and the market based indicators we use to monitor recession risk.
We are still playing catch up on the economic data releases due to the government shutdown so a lot of the data released in the last month is from November and December. It isn’t really news anymore but some of it is interesting. Overall, the data supports what we’ve been reporting and expecting for months – the economy is slowing but does not look recessionary. We continue to expect the economy to slow back to the long term trend of around 2% growth. It is

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Market at the Crossroads

February 14, 2019

I went to the crossroad, fell down on my knees
i went to the crossroad, fell down on my knees
asked the lord above “have mercy, now save poor bob, if you please”
yeoo, standin’ at the crossroad, tried to flag a ride
ooo eee, i tried to flag a ride
didn’t nobody seem to know me, babe, everybody pass me by
standin’ at the crossroad, baby, risin’ sun goin’ down
standin’ at the crossroad, baby, eee, eee, risin’ sun goin’ down
i believe to my soul, poor bob is sinkin’ down
Robert Johnson
 
A lot of people know the song Crossroad Blues, although I imagine most people don’t know it as a Robert Johnson song. It was originally recorded in 1936 in San Antonio for ARC records along with some other Johnson songs that aren’t known as Robert Johnson songs, including Sweet Home Chicago and Terraplane

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Monthly Macro Monitor – January 2019

January 24, 2019

A Return To Normalcy
In the first two years after a newly elected President takes office he enacts a major tax cut that primarily benefits the wealthy and significantly raises tariffs on imports. His foreign policy is erratic but generally pulls the country back from foreign commitments. He also works to reduce immigration and roll back regulations enacted by his predecessor. This President is widely rumored to have had numerous adulterous affairs and his administration is wracked by repeated scandals. He often seems overwhelmed by the job of President and confides to friends that he wasn’t prepared for the job.
President Trump? No, that describes the Presidency of Warren G. Harding. It only got worse after he died of a heart attack in the third year of his term and the Tea Pot Dome

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Living In The Present

January 5, 2019

The secret of health for both mind and body is not to mourn for the past, nor to worry about the future, but to live in the present moment wisely and earnestly.
Buddha
Review
It’s that time of year again, time to cast the runes, consult the iChing, shake the Magic Eight Ball and read the tea leaves. What will happen in 2019? Will it be as bad as 2018 when positive returns were hard to come by, as rare as affordable health care or Miami Dolphin playoff games? Will China’s economy succumb to the pressure of US tariffs and make a deal? Will the Fed keep hiking rates? Or will they be forced to cut to stave off a recession? Will the Dow keep jumping in 1000 point increments? Will Europe hold together a while longer or will Italy blow the whole project? And who will dare to coach the Dolphins

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Monthly Macro Monitor – November 2018

November 29, 2018

Is the Fed’s monetary tightening about over? Maybe, maybe not but there does seem to be some disagreement between Jerome Powell and his Vice Chair, Richard Clarida. Powell said just a little over a month ago that the Fed Funds rate was still “a long way from neutral” and that the Fed may ultimately need to go past neutral. Clarida last week said the FF rate was close to neutral and that future hikes should be “data dependent” which makes this observer wonder what exactly past hikes were predicated on if not data. Maybe Powell’s thinking has changed since he made those remarks and he sent Clarida – and a few others – out to deliver the message that monetary policy is no longer on auto-pilot. Or maybe the bulls just want that to be true.  Yes.
And my admiration for Chairman Powell rises

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Monthly Macro Monitor – October 2018

October 23, 2018

Stocks have stumbled into October with the S&P 500 down about 6% as I write this. The source of equity investors’ angst is always hard to pinpoint and this is no exception but this correction doesn’t seem to be due to concerns about economic growth. At least not directly.
The most common explanation for the pullback in stocks – 6% doesn’t even qualify as a correction – is rising interest rates but I think it is a bit more complicated than that. Asset prices are obviously impacted by the discount rate applied but they are also driven by expectations regarding the stream of cash flow they generate. Changes in either – or both – can cause a change in investors’ perception of the value of the asset. The discount rate has obviously risen lately and the Fed has been about as clear as it ever is

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Monthly Macro Monitor – September

September 19, 2018

This has already been one of the longest economic expansions on record for the US and there is little in the data or markets to indicate that is about to come to an end. Current levels of the yield curve are comparable to late 2005 in the last cycle. It was almost two years later before we even had an inkling of a problem and even in the summer of 2008 – nearly three years later – there was still a robust debate about whether the US could avoid recession. The answer was, of course, no but we didn’t know that for sure until Lehman failed in September of 2008. 
Our views on the economy are driven more by market based indicators than the economic data itself. We use these monthly reviews to look at all the data and sketch a picture, a snapshot of the economy. But our investment process relies

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Global Asset Allocation Update – September 2018

September 10, 2018

The risk budget is unchanged again this month. For the moderate risk investor, the allocation between bonds and risk assets is 50/50.

Decoupling anyone? That’s what the market is whispering right now, that the recent troubles in foreign economies is contained and won’t affect the US. The most obvious example of that trend is the performance of US stocks versus the rest of the world. I am painfully aware of the divergence in performance as I have had the temerity to try and diversify my portfolio away from very expensive large-cap US stocks. That has been a mistake for going on a decade now and one has to wonder if diversification is still the free lunch Harry Markowitz thought. The bill for continuing to believe it prudent to own a variety of assets has been particularly steep this year.

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Monthly Macro Monitor – August 2018

August 15, 2018

The Q2 GDP report (+4.1% from the previous quarter, annualized) was heralded by the administration as a great achievement and certainly putting a 4 handle on quarter to quarter growth has been rare this cycle, if not unheard of (Q4 ’09, Q4 ’11, Q2 & Q3 ’14). But looking at the GDP change year over year shows a little different picture (2.8%).
The US economy is definitely accelerating out of the 2016 slowdown. The growth rate has risen in a near straight line from 1.3% in Q2 2016 to 2.8% in the most recent quarter. But the rate of ascent so far leaves a lot to be desired. This business cycle –  like all the others – has seen multiple slowdowns and accelerations (4 up-cycles and 3 down-cycles since 2009). The last up-cycle, starting in mid-2013, went from a 1.3%  to a 3.8% growth rate in 7

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Global Asset Allocation Update

August 1, 2018

The risk budget is unchanged again this month. For the moderate risk investor, the allocation between bonds and risk assets is evenly split. The only change to the portfolio is the one I wrote about last week, an exchange of TIP for SHY.

Interest rates are on the rise again, the 10-year Treasury yield punching through 3% again this morning. That is an indication that growth and/or inflation expectations have risen somewhat recently, but really not a lot has changed. Yes, Q2 GDP did indeed grow by 4.1%, according to the BEA, but the market is saying pretty clearly that it doesn’t mean much. If the market thought that level of growth was sustainable, the 10-year note would not be struggling to get over 3%. The fact is that there were a lot of caveats to that number and when you get to the

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Global Asset Allocation Update

July 25, 2018

Note: This will be a short update. We are shifting the timing of some of our reports. The monthly Global Asset Allocation update will now be published in the first week of the month, aiming for the first of each month. I’ll put out a full report next week. The Bi-Weekly Economic Review is shifting to a monthly update, published on the 15th of each month. We are doing this to make room for some new reports, podcasts and videos.
The risk budget is unchanged this month. For the moderate risk investor, the allocation to bonds and risk assets is evenly split. There are changes this month within the asset classes.

The only change to the portfolio this month is a shift in the bond allocation. Interest rates have started to rise again and it appears to be rooted in rising real growth

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Bi-Weekly Economic Review

July 19, 2018

This will be a fairly quick update as I just posted a Mid-Year Review yesterday that covers a lot of the same ground. 
There were, as you’ll see below, some fairly positive reports since the last update but the markets are not responding to the better data. Markets seem to be more focused on the trade wars and the potential fallout. I would also note that at least some of the recent strength in the data is related to the tariffs. Tariffs are taxes and if they know a tax is scheduled to rise, people will find a way to accelerate the activity or product involved. So, yes, we’ll see a good print on Q2 GDP, but some of that – and I don’t know of any way to quantify it – is due to stockpiling of things like steel and aluminum ahead of the tariffs. Our exports of food accelerated recently

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Mid-Year Global Markets Update

July 18, 2018

Volatility returned to markets with a vengeance in the first half of this year. 2018 started off as an extension of last year when volatility was almost wholly absent. Stocks roared out of the starting gate, up almost every day until January 26th. And then – whoosh. What took nearly a month to gain took just 6 trading days to give back and then some. Since that correction, the S&P 500 has traded in a range with a slight upward bias.
The correction that hit stocks in February was driven by a number of factors but was mostly a reaction to a market that had run too far, too fast. The narrative at the time was that inflation fears were driving interest rates higher and causing a revaluation of stocks. That never made much sense but it was a convenient rationalization to take profits.

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