There has been significant discussion recently to define or redefine the role of central banks and the objective of monetary policy. This post great recession definition is being labeled as Modern Monetary Theory (MMT). MMT makes the case that central banks should respond to growing government programs and economic demands by aggressively printing money, unconstrained by tax receipts and borrowing. If MMT succeeds in adoption, the impact to markets is meaningful. Investors may anticipate growing, high, and/or volatile inflation. This scenario hinders savers and investors alike because real returns in stocks and bonds become muted. The chart below from Research Affiliates shows the relationship between the 10 year treasury interest rate and inflation (CPI) dating back to 1961. Historically, the money supply has served to reign in inflation. The future may show the opposite to be true, also.

A typically reliable gauge of business conditions in the U.S. is published by Morgan Stanley and tracks headlines in financial media. As the chart indicates, the recent drop in the Headlines Index is severe and is now approaching the level last seen in early 2009. The latest reading of 13 is well below the 33 level considered necessary to forecast continued growth in the economy and just a fraction of the postrecession average of 55. The last time the index dropped this dramatically was in 2008 just before the Great Recession began. Trade tension with China may be fueling part of the collapse, but conditions are signaling that consumers are likely to retrench spending that will ultimately lead to lower profits and slower growth.

• The sub-component for Manufacturing fell all the way to 0 in the latest reading, suggesting a contraction in manufacturing orders and new employment could be imminent.

• The data is consistent with the latest release of the NY Fed’s Empire State business conditions that plunged a record-breaking 26 points into negative territory, well below expectations.

• Equity investors seem impervious to the weak economic data and rising risk of recession, bidding the S&P 500 to a new high as they trust the Fed will again be the white knight to save the day.

An epic Tug-O-War ensued in mid-April between the Fed and the bond market that shows no signs of going away, even if the Fed is hinting at their ultimate defeat. While the Fed was still sounding hawkish about rates and their projections showed more tightening ahead, the bond market began to move in the exact opposite direction. The 10-year Bond has now dropped from a yield of 2.6% two months ago to under 2% today. While the Fed has been saying the economy and labor market remain on track for growth, the bond market was screaming recession with an inverted yield curve.

There was some capitulation by the Fed in their June meeting. While they did not cut rates, they all but announced there would be a rate cut at the July meeting. Each Fed governor, whether a voting member or not, provides their personal estimate of where rates are headed. As of today, 8 of 17 believe a rate cut will happen this year with 7 of those 8 expecting a cut of 50 basis points by year end. That leaves a thin majority forecasting rates will remain unchanged.

The data over the last month certainly seems to be supporting the bond market’s view of growth. Capex spending has fallen sharply as the benefits of the corporate tax cuts have diminished, the ISM Purchasing Managers Index continues to fall and is at 2016 levels, and employment growth has fallen off a cliff. Add to poor corporate data that shows rising delinquencies at the consumer level and you can understand why the bond market is acting like the Fed may be too late in spiking the punch bowl.

The likelihood of a recession in the next year is over 50% in our view. While we can’t time the beginning of a recession, we can observe how various asset classes have performed over prior economic contractions. The past isn’t necessarily a perfect guide, but it can be informative. We can draw some conclusions about how asset prices might behave in a recession, and set expectations about performance.

Technically, a recession is a period when economic growth (GDP) contracts over two consecutive quarters. Recessions tend to be few and far between. That’s to say, the economy generally expands, and asset prices rise. But when the economy contracts, investors tend to shun risk assets, such as equities, in favor of safer assets, such as cash or high quality, short term Treasuries.

For equities, a recession can be problematic for high flying momentum names (at least initially). Given their higher valuations, momentum stocks have further room to fall when economic conditions deteriorate. Eventually, a momentum strategy will buy down-trodden stocks on the way back to recovery, but the initial drawdown can be painful. Conversely, low volatility stocks (i.e. equities that exhibit less than average price variability) tend to hold up better in a recession than momentum stocks. However, low volatility stocks can lag the major averages in an expanding economy. From a geographic standpoint, emerging markets tend to underperform developed markets during a recession. But longer-term, the risk of investing overseas can pay off in the form of above-average returns.

While much is continually made of the "New Normal" in the financial markets, volatility since the beginning of 2018 looks more like a return to the "Old Normal".

This month we attempt to identify whether the spike in market volatility suggests the onset of a bear market or a need for increased patience by investors. We show how a strategy to manage volatility, similar to Dynamic Risk Hedging, can be attractive from a risk/return trade-off.

Best advice: keep your belt buckled low and tight around your waist.

Brian and Geoff

If you have been watching the financial news lately, you’ve likely heard of the recent implosion of a few exchange-traded products, and the subsequent fallout from the news media about how these products pose a systemic risk to the financial system. In this installment of In the Spotlight, we’d like to shed our views on the ETF market and examine what happened in the recent demise of two specific products.

ETFs provide a way for investors – both large and small – to gain exposure to certain areas of the market, such as stocks and bonds, in a relatively efficient manner. With a single holding, investors can position their portfolios based on their views of how certain asset classes might perform. The largest ETF – the SPDR S&P 500 (SPY) – began trading in the early 1990s and commands roughly $260 billion in assets. For decades, investors have accessed the large-cap U.S. equity market by holding and trading SPY.

As time went by, and investor demand increased, product providers issued ETFs that tracked other markets, such as international and emerging market stocks, and fixed income. Investors could now build diversified portfolios with just a few holdings. For example, the equity exposure in a portfolio could be segmented by market capitalization, sector or industry. Likewise, fixed income exposure could be segmented by credit and duration. Simply put, ETFs became very useful tools for portfolio construction.

Having had a couple of weeks to process the voluminous amount of data and opinions at the Mauldin Strategic Investment Conference, it is easy to see that change is coming. The volatility since early February has been very different than what has been experienced since this bull market began.

This month's analysis focuses on what we are calling Regime Change and how that will impact investors and the markets.

We are always available to discuss how DRH is designed to navigate through the coming Regime Change.

Brian & Geoff

Robust Service Offering as a CERTIFIED FINANCIAL PLANNER™, CFP®

Colorado Springs, CO, February 15, 2017 - Geoffry Eliason, CFP® Chief Operations Officer at Peak Capital Management in Colorado Springs, CO has been authorized by the Certified Financial Planner Board of Standards (CFP Board) to use the CERTIFIED FINANCIAL PLANNER™ and CFP® certification marks in accordance with CFP Board certification and renewal requirements. Mr. Eliason has worked at Peak Capital Management since 2013 and is responsible for serving PCM's clients with customized wealth management solutions.

The CFP® marks identify those individuals who have met the rigorous experience and ethical requirements of the CFP Board, have successfully completed financial planning coursework and have passed the CFP® Certification Examination covering the following areas: the financial planning process, risk management, investments, tax planning and management, retirement and employee benefits, and estate planning. CFP® professionals also agree to meet ongoing continuing education requirements and to uphold CFP Board's Code of Ethics and Professional Responsibility, Rules of Conduct and Financial Planning Practice Standards.

We are excited to share this month's PCM Report which is our annual Roundtable discussion of the economy and markets.

Brian down with John Mauldin (Mauldin Solutions), Steve Blumenthal (CMG), and Clint Pekrul (PCM) at the recent Inside ETFs conference. The discussion was robust and challenged some commonly held views of consensus today.

There are many short videos linked throughout the report that we trust you will find informative.

All the Best,

Brian and Geoff

“Bigger than Brexit” is the line many around the globe were uttering in response to Donald Trump’s stunning sweep of the American Electorate that only the most ardent of Trump supporters could have thought possible. As we take a step back and consider the ramification of last night’s election, it seems clear this was not as big a surprise as the media would like people to believe.

The media did everything in their power to make the election about two personalities. While both candidates were disliked or distrusted by a majority of the U.S. voters, the media and the Democrat party assumed they had a winning formula by focusing on the idea that Trump was simply more dangerous. Trump did little to quell the vitriol with things he said and did while campaigning.

As it turns out, I think the election was far more about differing ideologies; competing philosophies for how government should look and operate and what actually brings prosperity to a nation. Some may have been drawn to campaign rhetoric but most Trump voters, in my estimation, were simply stating their belief we are on the wrong track as a country and drastic change is needed. It is understanding these competing philosophical worldviews that will ultimately determine the economic and market impact of the election.

The markets are going to be on edge as we are now just 5 days away from the most bizarre presidential campaign in more than a generation. Just when it looked like the polls were confirming a Clinton victory (assuming you can trust any poll, especially in light of the Brexit vote), the FBI's announcement it was reopening the email scandal investigation after more than 10,000 emails were found on Clinton's top aides laptop that had not been turned over in the investigation. We don't know if there is a smoking gun and probably won't before the 8th creating more uncertainty, if that were even possible.

This month we look at the likely fallout of an election where nearly everyone seems to be the loser. The impact on the markets will be very different depending on who is sworn into office in January.