2016 Strategic Investment Conference – 05-26-2016 Greetings!
“The problem with human beings is that they buy what they wish they had and they sell what they are going to need.”
– Mark Yusko
Yusko took the stage Thursday morning and told a story about a time in 1999 when he served as the chief investment officer of the University of North Carolina endowment. He presented to his board in December 1999 and showed them the GMO 10-year forward annualized return predictions. GMO had advised investors to expect a negative 1.9% over the coming decade (annualized per year for ten years from 2000 – 2010).
A board member told him, “I don’t ever want to hear you say GMO again,” citing his view that Grantham has been bearish for too long. Yusko was right. GMO was right, but under predicted the losses. Over that following ten year period, the market returned a negative 3.5% per year. (That is losing 3.5% of your money per year for ten years.)
Prince wrote and sang “Party like its 1999”. Yusko says, “Listen to him. It is 1999 all over again. We are at a top. Expect a 2000 – 2002-like market… Everyone is selling out of hedge funds. It is time to buy them. Get the endowment model plan – that is where you have to go.”
Bearish? Or do you see an opportunity? It really comes down to how you align the risks within your portfolio(s).
Over the next several weeks, I’ll be sharing with you my high level notes from the Mauldin 2016 Strategic Investment Conference. Think big picture macro-economic trends and ideas on how to capitalize on them. The consistent theme was debt and deflation. There were a number of good investment ideas.
Of particular interest to me were the insights around the challenges facing the Fed and the, alleged, February détente agreement between the Fed, the Bank of Japan, the ECB and China. Recall the stock market sell-offs last August and again this past January. The driver was the surprise Chinese currency devaluation. Jefferies’ David Zervos and my friend Jim Rickards call it the Shanghai Accord. The big four central banks met in Shanghai in February and a currency peace of sorts was struck. The system has stabilized for now. The issues, though, remain.
David Rosenberg, Lacy Hunt and Gary Shilling dominated Wednesday’s sessions and Geopolitical Analyst George Freidman shared his insights. Debt, deflation and deleveraging was the consensus view. They debated possible solutions.
I’m going to need some time to digest and organize my notes and will present them to you, hopefully in plain English, over the next several OMR posts. In the meantime, let me share with you a few bullet points.
By the way, I felt a bit like a kid in the candy store. Rosenberg and Shilling are both ex-Merrill Lynch. I remember them from my early days when I worked on the ML institutional arbitrage desk. Shilling was fired several years before I began my career. As ML’s chief economist, he had predicted recession and that’s something you don’t do when working for a sell side Wall Street shop. And he was right. Two of the brightest over many years.
Lacy Hunt made an extremely powerful argument for continued deflation and, ultimately, lower long-term bond rates. He didn’t disappoint.
Following, I share in short form to give you a feel for what is to come:
David Rosenberg –
“Last year’s constructive outlook had a short shelf life” – he was bullish in 2012. Not today.
Per the 2010 McKinsey Study, “it takes six to seven years to deleverage debt by 25% in order to get you to a better place in which you begin to see improvement – we have not delivered at all.”
The debt problem is global. “China is the chief culprit with 250% debt to GDP. How they end up dealing with this remains to be seen. Non-performing loans in the system have doubled in the last two years.”
George Friedman –
The title of his presentation was, “The World is Going to Hell, but We’re OK”
“5 billion of the 7 billion people alive today live in EurAsia.” That area is going through a massive destabilization.
He sees an Italian Banking crisis soon.
On Brexit, he said the outcome is mostly irrelevant at this point. That comment surprised me but makes perfect sense. “Nobody is listening to Germany.” The real story for Britain is their strong trade relationship with the U.S. We are their biggest customer.
He said, “South America is enormously attractive. Mexico is the most impressive. Indian companies have shifted manufacturing out of China and to parts of Africa and Latin America.”
Dr. Pippa Malmgren –
On inflation: Companies are starting to do things to maintain margins.
She called it sneak inflation – fewer Oreo cookies in each package and less cereal per box while the price remains the same.
Rent is up 8% year over year. The “cost of health care is going through the roof.”
“Really – no inflation?” she asked.
The bottom line is something is going on here.
The debt burden is bearing down and pushing politics to the extreme.
David Zervos, Jeffries’ Chief Market Strategist –
He walked onto the stage with an “I love QE” baseball hat.
He believes there is a current truce in the ongoing currency war.
The Fed raised rates in December and the Chinese sent a message in January – shocking the global markets with its currency devaluation. It sent the same message last August.
Since the Chinese have long pegged their currency to the dollar, what they are saying is that they don’t like this move for them right now.
This creates a big problem for the Fed’s plans to normalize interest rates.
Yellen pivoted from hawkish (tightening) to dovish (keep rates unchanged, maybe more QE) while Japan and the ECB changed their message.
They collectively agreed that they don’t want the dollar to rise. Which would push the Chinese to devalue their currency against the dollar and against the other major currencies.
August and January gave us a preview of the danger to a Chinese devaluation.
His view is that there will be no big spikes in the dollar supporting a favorable environment for risk assets.
Thus, the “I love QE” hat.
Dr. Lacy Hunt –
I recently linked to his invaluable quarterly letter. You can find it here.
The issue is debt. Whether the U.S., U.K., Japan, Euro zone, Australia, Australia, Canada and now China, all are above the 250% to 275% debt to GDP level that most credible academic studies tell us “bad things happen”.
The U.S. is at 360% total debt to GDP; Japan is at 650% debt to GDP.
He said, “Nominal GDP is the single most important economic indicator. This is the worst economic recovery… by far.”
Interest rates may bump higher but they are heading lower.
“Monetary policy is impotent and out of the game.”
He is 100% long – long-term treasury bonds. He believes rates on the 30-year Treasury bond will move towards 1.5%.
Dr. Gary Shilling –
Shilling, like me, is in the Hunt camp.
Debt’s the issue.
More on Shilling next week.
On My Radar
With kind regards,
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
King of Prussia, PA