My good friend David Hay, Chief Investment Officer at Evergreen Capital Management in Bellevue, WA, has saved me the trouble of writing an introduction to the two pieces you’re about to read, which are by Charles and Louis Gave, a father-son duo who are no strangers to the readers of Outside the Box and my Over My Shoulder. For the first time in many years, due to other commitments, neither father nor son was able to speak at our just-concluded Strategic Investment Conference (though their Gavekal partner Anatole Kaletsky did play a prominent role in the conference); so David, who is also their business partner, thought we should make up for their absence by directing readers’ attention to two very significant pieces they recently penned.

I am back in Dallas trying to absorb what I learned at the conference. There were a very wide range and an overwhelming number of new and newly conjoined ideas. I hope to be able to get into a few of the more prominent themes in this week’s Thoughts from the Frontline. Every year we say it can’t get any better, and every year it seems to. And those who have attended for many years have been emphatic in saying that this year’s conference was the best ever. They wonder, along with me, how we can possibly make it better next year. We’ll have to see. I have a few ideas, and I expect to solicit a few more.

This year’s theme was “Investing in an Age of Transformation.” I have been thinking a lot about the changes we have seen over the last 40+ years of my adult life and what I can expect from the next 40 (hopefully), although we are going to need to see some cool new transformative biotech to make that next 40 of mine possible.

I have been collecting a lot of reading material on cool biotech to review while I’m in Tuscany. I leave next Thursday night for about two weeks in Trequanda, and then I’ll be in Rome for a few days, where I hope to meet with businesspeople and other thought leaders who can help with some insights into Italy and Europe. I’ll be there with Christian Menegatti of Roubini Global Economics, and we’ll be taking meetings together, mostly. Drop me a note if you would like to meet or make an introduction.

And now I’ll turn the floor over to David to introduce Charles’s and Louis’s latest and greatest.

Your still happily reeling from the conference analyst,
John Mauldin, Editor
Outside the Box
[email protected]

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Gave & Gave … and Hay

By David Hay
Evergreen Virtual Advisor, May 16, 2014

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety), by menacing it with an endless series of hobgoblins, all of them imaginary.”

– H.L. Mencken

If it’s May, it must be Mauldin. As avid EVA readers are aware, this is the time of year for the annual Mauldin/Altegris Strategic Investment Conference (SIC). Consequently, several Evergreen team members and I are in San Diego (I know, tough duty). It’s an exciting time as the always-stimulating SIC has helped us develop some crucial long-term insights over the years. Consistent with our custom, we will be recapping the most compelling ideas and themes that we attain at the conference in upcoming EVAs.

This year’s slate of speakers is once again impressive, with giants of the investment world such as Jeff Gundlach, David Rosenberg, Kyle Bass, and, our partner Anatole Kaletsky. Additionally, my close friend Grant Williams will be presenting his maiden oration at this prestigious confab. My only disappointment is that, unlike last year, our other senior partners, Louis and Charles Gave, will not be speaking as originally planned.

Accordingly, I thought I’d dedicate this edition of our monthly “Guest EVA” to a pair of essays Louis and Charles recently authored. (Some of you undoubtedly read Louis’ piece in our recent Daily, but it’s worth reviewing!) As you will see, Louis is addressing the theme I’ve written about in our last two EVAs: The shockingly low level of interest rates in most of the world (which is turning out to be a very hot topic at this year’s SIC). Contrary to what almost all pundits expected at the start of the year, these yields have dipped even lower in nearly every developed country.

Louis gives several concise reasons why the era of yields-gone-missing might not end anytime soon. (As an aside, my view is that ultra-low yields may continue to persist for much longer than expected by the investment community at large, at least for creditworthy issuers. However, I continue to believe that there is a 2008-like reckoning coming for weaker borrowers, where financing rates are nonsensically low and lending terms are also irrationally easy.)

Charles’ essay relates to a book you may have read about, Capital in the Twenty-First Century, by French economist Thomas Piketty. It recently hit number one on the Amazon best-seller list and, reportedly, numerous senior US government officials are captivated by its central message of aggressive wealth redistribution.

Now, you may think that “French economist” is synonymous with socialist, if not Marxist. To be sure, many of Piketty’s proposals would warm the cockles of old Karl’s heart, such as an 80% tax on incomes over $500,000 and an annual 10% wealth tax for large fortunes (e.g., for someone with a $10,000,000 net worth, making $1,000,000 per year, they would actually pay out almost twice as much as they earn!). Yet, Charles is also a French economist and, as you will see, he vehemently disagrees with several of Mr. Piketty’s core themes.

Some EVA readers may recall that I have long believed a wealth tax is inevitable in the so-called “rich” countries whose governments (ex-Canada) are increasingly impoverished. Moreover, I feel that if properly structured (i.e., low rates and nearly zero loopholes), a US wealth tax, combined with much lower personal and corporate income tax rates (again, with the elimination of almost all deductions), would likely catalyze a growth boom and a restoration of our national balance sheet.

As indicated by the runaway success of Mr. Piketty’s book, there is intense interest in the wealth tax issue among the intelligentsia. Those of a more practical bent, who realize the growth-killing impact of his proposed confiscatory tax rates, especially on income, might want to start offering alternatives. Devoid of a more pragmatic solution, the Pikettys of the world may capture the minds of the planet’s politicians and the hearts of their voters.

Why Are Bond Yields So Low?

Louis-Vincent Gave

As long as men continue to age, they will probably complain that “things were better in their day” and that “the world is going to hell in a hand-basket”. Ignore for a moment that the proportion of undernourished people fell from 23% of the developing world in 1990-92 to under 15% in 2010-2012, that more than two billion people gained access to improved sources of drinking water in the past decade, and that never in history have so many people across the globe lived so comfortably—as far as financial

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