June 10, 2016
By Steve Blumenthal
“The best thing we can do is get back to pricing risk.
Getting to that point should be and will be painful.”
— PJ Grzywacz, President, CMG Capital Management Group
“Central banks don’t like being the only game in town,
but they don’t know how to get out of it.”
— Mohamed A. El-Erian, Chief Economic Adviser, Allianz
“If I had gone to people four years ago and said, ‘Forty percent of the world’s sovereign bonds would be at negative rates (even 40 percent of corporate bonds now in Europe are coming out at negative rates), central banks would expand their balance sheets $10 trillion, and that the world would somewhat look normal, with all of the geopolitical risks that we have with ISIS, etc.,’ people would have said, ‘John, what are you thinking?’ And yet all of those unthinkable things have come about.”
— John Mauldin, Chairman, Mauldin Economics
“Suffering comes from having an argument with reality.”
— Buddhist proverb
Our team spends a great deal of time debating the economic outlook and to say PJ Grzywacz is bright would be an understatement. Sometimes our discussions get passionate and I think it is a good thing. To wit, passion in everything is a good thing. PJ challenges all things that might lead to “groupthink” biases. Something we think about a lot.
Over the last several weeks, I’ve been sharing my notes from Mauldin’s Strategic Investment Conference held in Dallas in late May. In groupthink terms, the overall tone was bearish. Debt, deflation and demographics remain a challenge. Rosenberg, Grant, Shilling, Hunt, Yusko, Friedman, Fisher and Mauldin are all in the bear camp.
Geopolitical strategist George Friedman titled his presentation, “The World is Going to Hell…But We’re OK.” Relatively speaking, North America is in good shape. I share with you my notes from his presentation in fast-paced bullet point form. Former Dallas Fed President, Richard Fisher said that most of the people he knows have a sizable portion of their assets in cash. Asked what position his portfolio is in, he responded, “The fetal position.”
Perhaps this is what his friends are seeing:
“The artificially high asset prices caused by zero interest rates and central bank purchases have created what El-Erian calls liquidity delusion. Investors, he warns, should be prepared for increased volatility as a result of the divergence in policy between the Federal Reserve and the European Central Bank, the Bank of Japan and the People’s Bank of China. Volatility will lead to patches of illiquidity that will accentuate volatility.
But all is not lost, El-Erian says. The key for investors is to remain very nimble and take advantage of volatility when asset prices overshoot. He suggests treating cash as part of the strategic allocation of a diversified portfolio — advice the long-time investor has put into practice for himself. El-Erian has had the bulk of his money in cash since last spring.” From Michael Peltz, Editor, InstitutionalInvestors.com (January 2016).
Today, I share the last of my notes from the conference. Keep the concept of “groupthink” in the back of your mind. Not all were bearish. Though it seems our collective hope rests on coordinated central bank policy at the same time our fiscal authorities get their acts together. Wishful? I’m not holding my breath.
Fisher was critical of Yellen yet clear that the Fed knows what it needs to do. I found his presentation particularly interesting. Finally, let’s conclude today’s piece by taking a look at the most recent valuation metrics. You’ll see they are higher than in 2007 and pretty much any period of time with the exception of the late 1990’s and early 2000’s.
Grab that coffee, find your favorite seat and dive in. Click on the orange link for the full OMR.
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Included in this week’s On My Radar:
- George Friedman – Geopolitical Strategist
- Richard Fisher – Former Dallas Fed President
- Concluding Thoughts – Pippa, Mauldin and Ferguson
- A Quick Look at Valuations (They Remain High)
- Trade Signals – Nearing an All-Time High
- What You Can Do
George Friedman – Geopolitical Strategist
George Friedman is an internationally recognized geopolitical forecaster and strategist on international affairs. Following are my notes from the Strategic Investment Conference in bullet point format. Friedman’s presentation is entitled, “The World Is Going to Hell…But We’re OK” (I know… what a start).
- Eurasia – 5 billion of the 7 billion people alive today live in this area.
- They are going through a period of massive destabilization.
- He sees a coming crisis in Germany and believes an Italian banking crisis is up next.
- Russia is building military forces as rapidly as it can.
- 50% of the Russian budget relies on oil.
- We have a country with 2,000 nuclear missiles that is destabilizing now.
- China is like Japan in 1989 (economically).
- Middle East – in a word “disintegrating.”
- The entire Eurasia land mass is in a state of failure. Money is surging out of this area.
- The heartland of humanity is destabilized.
- Yet at the same time, North America is in good shape.
- Mexico has emerged as the world’s 11th largest economy.
- On the U.S. he noted the following – Lehman Brothers collapse was the 4th devastating crisis since 1972.
- We’ve had the S&L crisis (early 1990s), muni crisis, foreign debt crisis and Lehman (SB here: though I’d put Long-Term Capital Management in the mix).
- Noting when crisis happens in the U.S., “we get all the players in one room and we fix it.”
- “We wipe out a bunch of investors. We’ve invested things before to bail us out and we’ll do it again.”
- “That doesn’t happen in Europe. There is no structure in Europe. They are not set up to deal with crisis.”
- So Europe poses a large geopolitical risk.
- Then there is Russia. When Russia invaded Georgia, they announced to the world, “We are back.” With several “lines in the sand” since crossed, he believes the U.S. has effectively said to many of its allies “we do not have your back.” He added, “We are not in the business of being the world’s nanny anymore.”
- When Europeans ask him, doesn’t Obama understand our problems? George answers, “Yes… he just doesn’t care.” (SB here: Ugh on that quote).
- He believes our current financial crisis is manageable as the U.S. is rich in assets and largely self-sufficient (especially with growing energy independence); this, despite our debt and entitlement problems.
- On China – China was purposefully built as an export model. The future of an exporting country depends on the willingness for its customers to buy. When the world broke, the Chinese exporters failed.
- If you live in a country earning $2 per day, you cannot buy an iPad. China has to have exports to pay the loans that the banks have made. When your exports go south – expect bad loans (defaults).
- By 2011, it was much cheaper to produce in Mexico, Vietnam and Singapore. China lost its competitive edge. It was evident then that China was not in good shape.
- China recently arrested 300 people that work in the government’s statistics department – they have now admitted that the numbers they report have been false.
- It is now evident the “Chinese miracle” has popped.