Debt-to-GDP ratio increased in all advanced economies from 2007-14, and the trend is continuing

“If you make an investment and feel good about it, you’ll lose money.
If you make an investment and you don’t feel good about it, you’ll make money.
Go shopping when things are on sale.”

–  Mark Yusko, Morgan Creek Capital Management
2017 Strategic Investment Conference

“Forget Trump!  What is the Fed’s reaction function?
The Fed is the elephant in the room and they are always the elephant in the room.”

–  David Rosenberg, Gluskin Sheff
2017 Strategic Investment Conference

Mark Yusko is founder and CEO of Morgan Creek Capital Management and former chief investment officer of the University of North Carolina’s endowment.  He set the stage for an outstanding last day at the 2017 Strategic Investment Conference in Orlando.  I’ve quoted him often in past letters.  He’s sharp, quick and a seasoned (smart) investor.

Over the next two to three weeks, I’m going to share with you my high level notes of the conference and some investment ideas (e.g., India looks great).  There was bullish discussion on China and emerging markets, but the developed markets are a different story.  The Fed and central bankers must remain on our radars.

Here are our three main takeaways from the SIC 2017:

  1. Economic Power Shifts from West to East: India and China’s share of world GDP has increased six-fold since 1970. Meanwhile, the G7 nations’ share of global trade has declined from 50% to 30%. This shift in economic power presents one of the greatest investment opportunities in history… and also carries many risks.
  2. Demographics are Destiny: Populations in the West are aging rapidly. In the US alone, 10,000 people turn 65 every day… and will do so for the next dozen years. An aging population means less economic activity, which has profound implications for your portfolio.
  3. The Coming Technological Revolution will Change the World: Over one-third of US jobs are expected to be automated over the next decade. But automation and advances in technology aren’t just affecting manufacturing workers—they will impact your future investment success.

There was consensus around what John Mauldin is calling “The Great Reset.”  Those nagging bubbles: debt and entitlement promises.  The demographic needs simply don’t square with the promises made.  The math won’t work.

Ideas were shared as to possible solutions.  And there are solutions.  So it doesn’t mean we have to face another crisis; however, it’s my view that it will likely take a crisis to bring political leadership together.  Just saying.

David Zervos, Ph.D. from Jefferies spoke of a debt jubilee, saying “People don’t understand that when you have big slugs of debt that sit over an economy, it suffocates the economy.”  Mauldin believes we (the developed countries) will all hold hands and jump together.  Essentially monetizing our debts (print buy and burn it).  Essentially a debt jubilee with each country keeping tight bands around their currency.  Referencing the enormous fire that destroyed the House of Parliament in 1834, Yusko said we will “burn the tally sticks.”

I wrote last week, Ray Dalio said “The Near Term Looks Good, The Long Term Looks Scary.”  The good news is you and I are going to get through it.  It will require good offense and great defense to be in a position to take advantage of the buying opportunity that the next bear market will create.

Over the next few days, I will receive the audio files and copies of all the presentation slide decks.  I’m a chart guy and there were some great charts.  I’ve taken so many notes and want to make sure I share them with you in a concise and clear way.

What I like most about Mauldin’s conference is polite confrontations that occur when the presenters get together on stage.  Talk about stress testing amongst and in front of a very smart group of individuals.  For example, geopolitical analyst George Friedman sees a 70% chance we strike North Korea by early June.  Yikes!  The other three geopolitical strategists disagreed.

George cited pre-war-like military build-up, F-35 fighter activity and Chinese movement along the border.  Dr. Pippa Malmgren was outstanding as was her father, Dr. Harald Malmgren.  He is a scholar, a former ambassador, international negotiator and senior aide to Presidents John F. Kennedy, Lyndon B. Johnson, Richard Nixon and Gerald Ford.  This man is on the inside and his insights were helpful.  The Malmgrens, along with geopolitical strategist Ian Bremmer, had a softer view on North Korea.  They believe the US may be working with China to assist them in taking care of the “thorn” in their (and our collective) side.  Keep this on your radar.  More notes to follow.

Mauldin’s presentation was outstanding.  He wrote last week about what he is calling “The Great Reset.”  It was much of that content he shared in his closing presentation and concluded with ideas on how to invest in the period ahead.  So let’s start there today and set the stage for what will be a series of letters (my notes) over the coming weeks.

As a quick aside, my Orlando plane home to Philly was diverted to Pittsburgh.  It was bumpy and the storm was severe.  Let’s just say I’m happy to be in Pittsburgh.  No favorite writing chair this morning, no beautiful Susan next to me and no yummy coffee, but hey, it’s great to be alive.  Grab a coffee and read on.  Mauldin presents a strong case.

I hope you find On My Radar helpful for you and your work with your clients.  And please feel free to reach out to me if you have any questions.

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Included in this week’s On My Radar:

  • The Great Reset: How Should We Then Invest?  By John Mauldin
  • Trade Signals — Don’t Fight the Tape or the Fed
  • Personal Note — Almost June

The Great Reset: How Should We Then Invest?  By John Mauldin

“A speculator is one who runs risks of which he is aware,
and an investor is one who runs risks of which he is unaware.”

– John Maynard Keynes

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist.
They assume that something that was a good investment in the recent past is still a good investment.
Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

– Ray Dalio

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This letter and next week’s will be two of the most important I’ve ever written. They will set out my philosophy about how we have to invest in the coming days and years. They are the result of my years of actually working with clients and money managers and thinking about the economic and particularly the macroeconomic world. Because of some of the developments I will be discussing, I think the future is likely to be extremely challenging for traditional portfolio allocation models. The letters also discuss my thinking on new developments in markets that allow us to more quickly adapt to our ever-shifting environment, even when we don’t know in advance what that environment will be. I hope you find the letters helpful.

Longtime readers know that this letter tends to talk more about our global economy’s problems than about its positive opportunities. That’s not to say that I ignore the opportunities. In