“Your job as investors is to feel sick to your stomach.
Do not invest when you are excited and everything is great… go shopping when things go on sale.”
“We will have a recession sometime within the next 12 months. It is not going to be different this time.”
– Mark Yusko, Morgan Creek Capital Management
2017 Strategic Investment Conference
Today, you’ll find my high level notes from Mark Yusko’s presentation at the Mauldin Economics 2017 Strategic Investment Conference. It was outstanding and I hope you gain as much from the information as I did. By way of short introduction, in 1999, Mark Yusko, then CIO of the University of North Carolina’s endowment, recommended a significant reduction in the fund’s equity exposure to the board of directors. He advised that forward equity market returns would be a –1.90% over the coming seven years. Mark cited GMO’s famous 7-year Asset Class Real Return Forecast. One of the board members was irate and shouted, “I never want to hear those three letters ‘GMO’ again.”
The actual return achieved over the subsequent years was -3.5%. Mark and GMO were right. Even board members get emotional.
Today, GMO is forecasting -4.0% real annualized returns (not a typo) over the next seven years (2017-2024). Compound that out and your $1,000,000 turns into $751,447. A loss of nearly 25%. One might think 7 x -4 = -28%; however, there is some benefit to how math compounds negatively. But negative it is.
By the way, GMO has been doing this same forecast each month for many years. CXO, LLC, a research advisory group, found “…correlation for these two series is 0.94, and the R-squared statistic is 0.88. The GMO forecasts tend to be high by less than 1%.”
Correlation is a statistical measure that indicates the extent to which two or more variables fluctuate together. A positive correlation indicates the extent to which those variables increase or decrease in parallel; a negative correlation indicates the extent to which one variable increases as the other decreases. R-squared is another measure of correlation. The score ranges from 0 to 1 with 1 being perfectly correlated. The CXO study shows a high degree of accuracy. Not perfect but not to be ignored.
Yusko’s point then and today is that your starting point conditions matter. Here is GMO’s most recent 7-Year forward return forecast.
Today, you’ll find my summary notes from Mark Yusko’s presentation below. I enjoyed both his fast pace and fun personality. It will print long due to the many charts, but it is so worth your time.
Last week I shared with you my high level notes from Dr. Lacy Hunt’s SIC presentation. Lacy argued that recession is nearing and interest rates are headed even lower. He said that your starting point conditions matter when thinking about future returns and he shared the challenges facing us given today’s “initial conditions.”
Mark sees risks of a replay of the early 1930s legislative mistakes. He says not one incoming Republican president has avoided recession and a return to Hooverville is probable. He’s calling it Trumpville. “Beautiful” or “ugly?” Yikes… put Trumpville in the “ugly” outcome camp. My heart remains hopeful and focused on “beautiful.” But Yusko also sees opportunities in India, China and emerging markets.
If you haven’t heard of Mark before, here is a brief bio.
From 1993 to 1998, Yusko was a Senior Investment Director at the University of Notre Dame Investment Office. From 1998 to 2004, Yusko was founder and chief executive officer of UNC Management Company, Inc. Yusko left UNC to start Morgan Creek Capital Management in 2004.
Morgan Creek’s primary macroeconomic investment themes are forward looking and long term (5 to 10 years). They represent the synthesis of our global investment research, helping us determine where we can expect economic tailwinds in the markets and how we can best capitalize on the investment opportunities created by these long-term trends. OK – sharp guy.
Speaking of “initial conditions,” one of the many charts Mark shared showed that we are in the third longest economic expansion ever (data 1845 to present). And he believes that, when it turns, it won’t be pretty.
Here is how you read the chart:
- Note on the right-hand side stock market performance in recessions.
- Note in the upper right (baby blue color) the summary of average declines since 1980, average post-war and the overall average. Call it -38% recession correction average since 1980.
- The left-hand side of the chart shows the various length in months of previous economic expansions (red bar is the current expansion).
We are late in the business cycle. Note in red in this next chart: “…The Economy Is Probably Here.”
“Demographics is destiny,” Yusko said. You’ll find the same bullet point format again this week along with selected charts. His presentation was outstanding.
I hope you enjoy the notes as much as I enjoyed reviewing and processing the information. “Initial conditions” matter. I believe you’ll find some actionable ideas.
Grab that coffee and find your favorite chair – and jump in. And enjoy your weekend!
? If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ?
Included in this week’s On My Radar:
- Mark Yusko — Ten Surprises
- Trade Signals — S&P 500 Up 8.7% YTD; Trend Evidence Remains Bullish
- Personal Note
Mark Yusko – Ten Surprises
“Making predictions is hard, especially about the future….”
– Yogi Berra
Mark’s presentation lasted about 52 minutes. He sees low growth for the foreseeable future. 4% GDP growth is not going to happen. Also, he believes a recession is coming within a year, interest rates will remain on a path lower and that a stock market crash may occur this September/October.
Taken from his 2017 SIC presentation, following are my notes in bullet point format along with selected charts (note that the numbers on the actual charts do not match the chart numbers I give below. Mark’s presentation had over 130 charts. I’ve selected what to share with you along with corresponding notes):
Surprise 1: Demographics Is Destiny
- When the big guy plants that bridge, it creates a whole bunch of crowding out. All the hopes on infrastructure spending and regulatory reform, while good; is not going to really make a difference.
- Mark said Lacy Hunt did a better job explaining why this is not going to work… and it is not going to work – (click here for last week’s notes on Lacy Hunt’s presentation to learn more).
- Mark’s major point is everyone is saying that because of the big man (federal government tax cuts and infrastructure spending) growth is going to suddenly be awesome in the United States… but it is