“There is no other agency of government which can overrule actions that we take.” 
– Alan Greenspan
The Federal Reserve (Fed) currently expects real economic growth for the foreseeable future to average below 2.00%. Japan, the United Kingdom, and the European region are forecasting an even more anemic pace. On numerous occasions, we have detailed the reasons the United States and many foreign nations are mired in economic stagnation. At the top of our list, is the over-reliance on debt and the burden that decades of debt-driven-consumption policies have inflicted upon economic activity. To not only accommodate existing debt, but promote more debt, Keynesian schooled central bankers have presided over extremely easy monetary policy for years. Policy has been administered through a

Recently on our Twitter feed, @michaellebowitz, we introduced the hashtag #fedgibberish. The purpose was to tag Federal Reserve members’ comments that highlight desperate efforts to rationalize their inane monetary policy in the post-financial crisis era. This past week there were two quotes by Fed members and one by the head of the European Central Bank (ECB) which were highly deserving of the tag. We present them below, with commentary, to help you understand the predicament the Fed and other central banks face.
Lael Brainard
On September 5, 2017 Fed Governor Lael Brainard stated the following in a speech at the Economic Club of New York:
“We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” – “There is a high premium

When people use the word catalyst to describe an event that may prick the stock market bubble, they usually discuss something singular, unexpected and potentially shocking. The term “black swan” is frequently invoked to describe such an event. In reality, while such an incident may turn the market around and be the “catalyst” in investors minds, the true catalysts are the major economic and valuation issues that we have discussed in numerous articles.
Most recently, in 22 Troublesome Facts, 720Global outlined factors that are most concerning to us as investors. As a supplement, we elaborate on a few of those topics and build a compelling case for what may be a catalyst for market and economic problems in the months ahead.
Debt Burden
Debt serves as a regulator of economic growth and is

The amount of monetary stimulus increasingly imposed on the financial system creates false signals about the economy’s true growth rate, causing a vast misallocation of capital, impaired productivity and weakened economic activity. To help quantify the amount of stimulus, please consider the graph below.

Data Courtesy: Federal Reserve
Federal Reserve (Fed) stimulus comes in two forms as shown above. First in the form of targeting the Fed Funds interest rate at a rate below the nominal rate of economic growth (blue). Second, it stems from the large scale asset purchases (Quantitative Easing -QE) by the Fed (orange). When these two metrics are quantified, it yields an estimate of the average amount of stimulus (red) applied during each post-recession period since 1980. It has been almost

“Valuations are still well below the peak of 1999” say the bulls. They are certainly correct from an absolute basis but we caution that the current level of market euphoria is in a league of its own when compared to prior peaks on an “apples to apples” basis.
The following table compares earnings growth and implied market expectations for earnings growth from the two prior CAPE (Cyclically-Adjusted Price-to-Earnings) peaks to today. CAPE is the price of an equity index, such as the S&P 500 in this case, divided by the average of ten years of earnings adjusted for inflation. Implied market earnings growth is the rate of earnings growth required for the next ten years to return CAPE to its historical average assuming no price changes.

Earnings over the last ten years have grown

Currency was first developed about 4000 years ago. Its genius was in the ability to supplant barter thus greatly improving trade and providing a better means for storing value. As illustrated in our title, currency has taken on many different physical forms through the years. Given the recent advances in technology, is it any surprise the latest form of currency resides in the ether-sphere? In this article we explore the basics of cryptocurrencies and the important innovation they support, blockchain. We also offer an idea about whether or not Bitcoin, or another cryptocurrency, can become a true currency worthy of investment.
A Primer on Cryptocurrency and Blockchain
Cryptocurrency is an independent, digital currency that uses cryptology to maintain privacy of transactions and control

Thanks to Jesse Felder, we recently stumbled upon a measure of economic conditions that has reliably signaled every recession since 1948. The data point, Real Value Added, is currently in negative territory and may, therefore, be a harbinger of an economic downturn.  If it is a false signal, it would be the first in a 70-year history of observations.
720Global does not rely on any one data source to determine the pace of economic activity or to formulate recession probabilities. Instead, we analyze data from many different sources to help better understand the likely path of the economy. That said, when a single data source has an indisputable track record, we take notice and look for other corroborating evidence and bring it to your attention.
Gross Value Added (GVA) and Real Value Added

Below are 22 realities to explain why 720Global does not recommend following the herd.
Equity/Bond Valuations
The S&P 500 Cyclically Adjusted Price to Earnings (CAPE) valuation has only been greater on one occasion, the late 1990s. It is currently on par with levels preceding the Great Depression.
CAPE valuation, when adjusted for the prevailing economic growth trend, is more overvalued than during the late 1920’s and the late 1990’s. (LINK)
S&P 500 Price to Sales Ratio is at an all-time high
Total domestic corporate profits (w/o IVA/CCAdj) have grown at an annualized rate of .097% over the last five years. Prior to this period and since 2000, five year annualized profit growth was 7.95%. (note- period included two recessions) (LINK)
Over the last ten years, S&P 500 corporations have

“What we’re seeing is an increase in the evolutionary pace of IED (improvised explosive device) design. It’s increasing at a pace we previously haven’t seen.”  – Ben Venzke
The traditional benchmark asset allocation is 60/40 – 60% in stocks, 40% in bonds. Such a “balanced” allocation is  considered to be a moderately conservative investment posture as drawdowns in equity prices have typically been partially offset by gains on fixed income holdings. Since the financial crisis of 2008, the appetite for higher returns sparked by historically low yields on many fixed income assets may have changed that asset allocation calculus. What may appear to be nuance to some could cause a gross underestimation of risk if equity prices fall.
To explain, consider a simple proxy 60/40 portfolio. We assign

“I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant” – Alan Greenspan
On July 12, 2017 in her semiannual testimony to Congress, Janet Yellen stated the following:
“The Federal Funds rate would not have to rise all that much further to get to a neutral policy stance.”
Currently the target for the Federal Funds rate is a range of 1.00-1.25%, having been raised four times since December 2015. Despite the increase from the zero level that persisted for seven years following the “Great Financial Crisis,” it is still at microscopic levels as shown below.

Data Courtesy: St. Louis Federal Reserve (FRED)
Per Janet Yellen’s comment, the “neutral policy stance” is another way of saying that the Fed funds rate is appropriate

The Federal Reserve Act, as mandated by Congress, established a dual mandate of price stability and maximizing employment to guide the Federal Reserve (Fed) in setting monetary policy. Price stability, the topic of this article, allows investors, corporations, and consumers the ability to better predict future prices and optimally allocate their investments and spending. The benefits pay dividends not only to those directly involved but importantly to the health of the economy and prosperity of the populace as well.
To consider why price stability is important, consider an oil producer deciding whether or not to invest in a new well. To simplify, assume the producer needs only to consider three variables to properly evaluate the project: (A) investment costs (fixed/variable), (B) a

On June 7, 2017, 720Global published The Fed Giveth to premium subscribers of their flagship publication The Unseen. The article provides background explaining why investors are well-served to understand the effect that Quantitative Easing (QE) has had (and will have) on the markets. Due to the importance of this article we elected to share meaningful excerpts. For access to the entire article please contact 720Global at [email protected]
The Fed Giveth
In December 2008, at the peak of the financial crisis, the Federal Reserve (Fed) lowered the Federal Funds interest rate to zero. In taking this unprecedented step, many investment professionals assumed the Fed was out of bullets to stem the crisis. Federal Reserve Chairman Ben Bernanke proved them wrong by introducing Quantitative

“Are you kidding? Are you kidding? No one knows what you’re doing.”  – Economist John Taylor in response to William Dudley’s (President Federal Reserve Bank of New York, Vice Chairman of the Federal Open Market Committee) comment that the Federal Reserve (Fed) has been very clear in their discussions about monetary policy.
For the last few years the Fed has repeatedly emphasized that they want to be as open and transparent about monetary policy actions as possible. Amid those reassurances, amateur and professional Fed watchers continue to be flummoxed by the vagaries of language used in speeches, lack of adherence to implied actions and outright contradictions between their words and deeds. As evidenced by the opening quote, one wonders whether they are being intentionally delusory or

“Cause when life looks like Easy Street, there is danger at your door” – Grateful Dead
On numerous occasions, we have posited that equity investors appear to be blinded by consistently rising stock prices and the allure of minimal risks as portrayed by record low volatility. It is quite possible these investors are falling for what behavioral scientists diagnose as “recency bias”. This condition, in which one believes that the future will be similar to the past, distorts rational perspective. If an investor believes that tomorrow will be like yesterday, a prolonged market rally actually leads to a perception of lower risk which is then reinforced over time. In reality, risk rises with rapidly rising prices and valuations. When investors’ judgement becomes clouded by recent events, instead

“The year 1915 was fated to be disastrous to the cause of the Allies and to the whole world. By the mistakes of this year the opportunity was lost of confining the conflagration within limits which though enormous were not uncontrolled. Thereafter the fire roared on till it burnt itself out. Thereafter events passed very largely outside the scope of conscious choice. Governments and individuals conformed to the rhythm of the tragedy, and swayed and staggered forward in helpless violence, slaughtering and squandering on ever-increasing scales, till injuries were wrought to the structure of human society which a century will not efface, and which may conceivably prove fatal to the present civilization.” – Winston S. Churchill – The World Crisis: 1915
After reading that quote several times,

There is a healthy debate between those who work in fixed-income markets and those in the equity markets about who is better at assessing markets. The skepticism of bond guys and gals seems to help them identify turning points. The optimism of equity pros lends to catching the full run of a rally. As an ex-bond trader, I have a hunch but refuse to risk offending our equity-oriented clients by disclosing it. In all seriousness, both professions require similar skill sets to determine an asset’s fair value with the appropriate acknowledgement of inherent risks. More often than not, bond traders and stock traders are on the same page with regard to the economic outlook. However, when they disagree, it is important to take notice.
We created the Trump Range Chart a few months ago to easily

On March 10, 2017, 720Global introduced the Trump Range Chart. Developed to see several different markets on one page, this unique chart provides a composite perspective of many instruments at once.  Given the large post-election market gyrations across many asset classes, our concern was, and still remains, that those moves are transitory, reflective of extreme and possibly unwarranted optimism regarding the ability of the new administration to pass bold economic initiatives. For a broad discussion of the harsh economic landscape Trump faces, our cause for doubt, please read The Lowest Common Denominator: Debt.
Unbridled Enthusiasm
On May 17, 2017, the S&P 500 fell 1.82% on rumors that President Trump had tried to persuade former FBI Director James Comey to influence the FBI

At the beginning of this year, I wrote an article entitled the “Death Of The Virtuous Cycle,” wherein discussed the reasons why, despite many promises, there has been no sustainable economic recovery. The United States, and the developed world for that matter, have made repetitive attempts over the last 16 years to return economic growth to the pace of years long past. These nations are stuck in a cycle in which hopes for economic “escape velocity” get crushed by economic recession and asset price collapse. Following each failure is an increasingly anemic pattern of economic growth accompanied by rising mountains of debt, which ultimately lead to another failure. The perpetual excuse from the central bankers is that not enough was done to foster “lift-off”. In their view, lower interest

“The individual investor should act consistently as an investor and not as a speculator.“ – Ben Graham.
We are frequently told that valuation analysis is irrelevant because fundamentals do not signal turning points in markets. Scoffers of valuation analysis are correct, as there is no fundamental statistic or for that matter, technical or sentiment indicator that can provide certainty as to when a market trend will change direction.
Despite being humbled by recent market gains and the difficulties associated with timing the market to call a precise top, we remain resolute about the merits of a conservative investment posture at this time. At some point, current equity market valuations will succumb to financial gravity and the upward trend of the last eight years will reverse. When that

“History has not dealt kindly with the aftermath of protracted periods of low risk premiums” – Alan Greenspan
The ability to see beyond the observable and the probable is the most important and under-appreciated characteristic of successful investors. For example, visualize a single domino standing upright. With this limited perspective, one can establish what the domino is doing in the present and form expectations around what might happen if the domino falls. However, by expanding one’s viewpoint, you may discover the domino is just one in a long line of dominoes standing equidistant from each other. The potential chain of events caused by the first domino falling now offers a vastly different outcome. Many investors myopically focus on the trends of the day and fail to notice the line of dominoes, or what is technically known as multiple-order effects.
Since the Great Financial Crisis of 2008, maintaining animal spirits has been a primary goal of the world’s central banks. The crisis proved a brutal reminder that, in this new era of significant leverage, a loss of investor confidence can result in violent reactions that ripple throughout the financial markets and the global economy. By employing extraordinary policies and optimistic narratives, the central banks have persuaded the public to believe that all is well.

What Rick Barry and the Atlanta Falcons can teach us about risk management
“Something about the crowd transforms the way you think” – Malcolm Gladwell – Revisionist History
With 4:45 remaining in Super Bowl LI, Matt Ryan, the Atlanta Falcons quarterback, threw a pass to Julio Jones who made an amazing catch. The play did not stand out because of the way the ball was thrown or the  agility that  Jones employed to make the catch, but due to the fact that the catch easily put the Falcons in field goal range very late in the game. That reception should have been the play of the game, but it was not. Instead, Tom Brady walked off the field with the MVP trophy and the Patriots celebrated yet another Super Bowl victory.
NBA basketball hall of famer Rick Barry shot close to 90% from the free throw line. What made him memorable was not just his free throw percentage or his hard fought play, but the way he shot the ball underhanded, “granny-style”, when taking free throws. Every basketball player, coach and fan clearly understands that the goal of a basketball game is to score the most points and win. Rick Barry, however, was one of the very few that understood it does not matter how you win but most importantly if you win.

Almost a year ago, we stumbled upon a topic that is currently generating much discussion in the financial media. In Mm Mm Good, published August 2016, we highlighted the Campbell Soup Company (CPB) and the utility sector to show how yield-starved investors were chasing dividend stocks to dangerously high valuations. The following quote from the article highlights the risk inherent in CPB’s valuation:
“This concept of a no-growth company with soaring valuations is alarming. The price of CPB would have to drop 30% to return to its post-recession average P/E. If that were to occur, it would take 16 years’ worth of dividend payments to recoup the price loss, assuming dividends remain stable”.
When writing that article, we assumed that a hunger for yield was the primary driver of excessive valuations in those relatively safer sectors. We did acknowledge, however, that there were other factors. Unbeknownst to us at the time, the shift from active to passive investing was one such factor playing a growing role in creating valuation divergences.
We followed up the article in November of 2016 with Passive Negligence. This sequel, of sorts, discussed valuation divergences and economic inefficiencies occurring as a result of the growing popularity in passive investing and the related decline in value/active management strategies.

This article, and those that will follow in this series, describes in simple but compelling form several objective truths about the dynamics of scarcity and prosperity and the role they play in human decision-making within the context of an economy. The simple elegance of the economic system we describe seems to have been long forgotten, buried under an accumulation of overly sophisticated explanations, theories and complex models.
The Forgotten Path to Prosperity
“The record of history is absolutely crystal clear. There is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”  – Milton Friedman
Whether one thinks of a market as barter, a grocery store, internet commerce or the New York Stock Exchange, the concepts behind each of them are identical.  In all of these marketplaces, people have resources which they are willing to give up in order to gain something else they deem as more valuable.
If I own a coop full of chickens that produces two dozen eggs every week, then I am not likely to pay for eggs in the grocery store.  More likely, a grocer may be willing to buy my eggs for re-sale to his customers.  If my portfolio is over-weighted with technology stocks, then I am less likely to seek new technology stocks to own.

Since the U.S. economic recovery from the 2008 financial crisis, institutional economists began each subsequent year outlining their well-paid view of how things will transpire over the course of the coming 12-months. Like a broken record, they have continually over-estimated expectations for growth, inflation, consumer spending and capital expenditures. Their optimistic biases were based on the eventual success of the Federal Reserve’s (Fed) plan to restart the economy by encouraging the assumption of more debt by consumers and corporations alike.
But in 2017, something important changed. For the first time since the financial crisis, there will be a new administration in power directing public policy, and the new regime could not be more different from the one that just departed. This is important because of the ubiquitous influence of politics.
The anxiety and uncertainties of those first few years following the worst recession since the Great Depression gradually gave way to an uncomfortable stability.  The anxieties of losing jobs and homes subsided but yielded to the frustration of always remaining a step or two behind prosperity.  While job prospects slowly improved, wages did not. Business did not boom as is normally the case within a few quarters of a recovery, and the cost of education and health care stole what little ground most Americans thought they were making.

Villanova versus Kansas
 Outcome versus Process Strategies
It is that time of year when the markets play second fiddle to debates about which twelve seed could be this year’s Cinderella in the NCAA basketball tournament. For college basketball fans, this particular time of year has been dubbed March Madness. The widespread popularity of the NCAA tournament is not just about the games, the schools, and the players, but just as importantly, it is about the brackets. Brackets refer to the office pools based upon correctly predicting the 67 tournament games. Having the most points in a pool garners office bragging rights and, in many cases, your colleague’s cash.
Interestingly the art, science, and guessing involved in filling out a tournament bracket provides insight into how investors select assets and structure portfolios. Before explaining, answer the following question:
When filling out a tournament bracket do you:
A) Start by picking the expected national champion and then go back and fill out the individual games and rounds to meet that expectation?
B) Analyze each opening round matchup, picking winners and advance round by round until you reach the championship game?
If you chose answer A, you fill out your pool based on a fixed notion for which team is the best in the country.

On the night of the U.S. Presidential election, many investment assets went from a state of sheer panic at the prospect of Donald Trump winning the election, to manic euphoria as the glorious narrative of Reagan-esque economic revival was born with Trump’s victory. Euphoric markets are not generally built on durable substance, and they eventually reconcile with reality as investors come to their senses.
In today’s case, the enthusiasm of pro-growth fiscal initiatives are destined to collide with decades worth of ill-advised economic policies and political obstacles. As such, we created the Trump Range Chart to track the performance of various key indexes and tradeable instruments since Election Day. This tool serves as a gauge of market sentiment and the market’s faith in Donald Trump’s ability to effect real economic change.
We suspect that when economic proposals meet political and economic reality, some markets will begin to diverge from their post-election trends. As is typically the case, it is likely that this will occur in some markets before others. Markets showing early signs of divergence may provide tradable signals. We plan on releasing this data regularly to help our clients track these changes. Based on feedback, we may produce new range charts to include different markets, various time frames, and economic data.

“Today’s equity market valuations have only been eclipsed by those of 1929, and 1999.”
Given the continuing equity market rally and multiple expansion, the quote above from prior articles, had to be modified slightly but meaningfully. As of today, the S&P 500 Cyclically Adjusted Price to Earnings ratio (CAPE) is on par with 1929. It has only been surpassed in the late 1990’s tech boom.
A simple comparison of P/E or other valuation metrics from one period to another is not necessarily reasonable as discussed in Great Expectations. That approach is too one-dimensional.   This article elaborates on that concept and is used to compare current valuations and those of 1999 to their respective fundamental factors.  The approach highlights that, even though current valuation measures are not as extreme as in 1999, today’s economic underpinnings are not as robust as they were then. Such perspective allows for a unique quantification, a comparison of valuations and economic activity, to show that today’s P/E ratio might be more overvalued than those observed in 1999.
Secular GDP Trends
Equity valuations are a mathematical reflection of a claim on the future cash flows of a corporation. When one evaluates a stock, earnings potential is compared to the price at which the stock is offered. In most cases, investors are willing to pay a multiple of a company’s future earnings stream.

The New England Patriots pulled off a stunning come-from-behind victory in Super Bowl LI, and one that was truly unprecedented in American football. Throughout modern NFL history, playoff teams that had a 19 point lead or greater in the fourth quarter, as the Atlanta Falcons did, were 93-0. A Patriots comeback was deemed virtually impossible by the odds-makers. There is an important lesson here worth considering. The Patriots improbable victory follows a variety of other unlikely, but surprising high-profile events in the past several months, some of which will have far greater impact on our lives than we may realize.
The British referendum to leave the Euro

Last summer, the odds of Brexit gaining a majority vote briefly dipped below 5% in the days preceding the vote. In a premonition to the upcoming U.S. election, The Sun newspaper in London mistakenly announced that the head of the Brexit campaign, Nigel Lafarge, conceded to the “Remain” vote.
Leicester City’s improbable Premier League Championship
Leicester City entered the 2016 Premier League season as a 5,000 to 1 underdog to win the league championship. Fortunately for Leicester City, the existence of long odds bear no direct influence on outcomes as they went on to win the Premier League Championship.

Danielle DiMartino Booth, a former Dallas Federal Reserve official, released a new book this week entitled Fed Up. The book, a first-person account of the inner-workings of the Federal Reserve (Fed), provides readers with unique insight into the operations, leadership, and mentality of what is unquestionably the world’s most powerful financial force.  What it reveals about the Fed is neither flattering nor confidence-inspiring. By pulling back the curtain to reveal the Fed’s modern-day machinations, DiMartino Booth provides an assessment of the highest levels of economic thinking and how it is afflicting our economy.
Throughout the book, it is clear her purpose is equal parts entertainment and education with a dash of sermon to underline the gravity of the situation.  Fed Up is compelling, well-written and its objectives are clear; expose the hubris at the Fed which results in poor decision-making and generate much-needed debate to bring about change in how the Fed functions. As you read this review, and hopefully the book as well, we remind you the Fed is sworn to serve the American public and should be held accountable to this obligation.
We thank Danielle for giving us the privilege of reading an advance copy of her book so that we can provide this timely review to you.

Danielle DiMartino Booth, a former Dallas Federal Reserve official, released a new book this week entitled Fed Up. The book, a first-person account of the inner-workings of the Federal Reserve (Fed), provides readers with unique insight into the operations, leadership, and mentality of what is unquestionably the world’s most powerful financial force.  What it reveals about the Fed is neither flattering nor confidence-inspiring. By pulling back the curtain to reveal the Fed’s modern-day machinations, DiMartino Booth provides an assessment of the highest levels of economic thinking and how it is afflicting our economy.
Throughout the book, it is clear her purpose is equal parts entertainment and education with a dash of sermon to underline the gravity of the situation.  Fed Up is compelling, well-written and its objectives are clear; expose the hubris at the Fed which results in poor decision-making and generate much-needed debate to bring about change in how the Fed functions. As you read this review, and hopefully the book as well, we remind you the Fed is sworn to serve the American public and should be held accountable to this obligation.
We thank Danielle for giving us the privilege of reading an advance copy of her book so that we can provide this timely review to you.