May 27, 2016
By Steve Blumenthal
“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 it’s 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.
Mark Yusko was outstanding. He said that the S&P 500 achieves its cyclical bull market high in the fourth quarter prior to a new president and said recessions almost always start in the first year of a new presidency. He, like me, sees recession next year. If oil spikes higher, then maybe recession comes sooner.
He thinks a 2000 to 2002-like period is ahead. And added, “Do not make investments that feel good. You will lose your money.” I’ll get a copy of his presentation and see if I can get permission to share it with you. Don’t get depressed! Ask what kind of portfolio can you build that enables you to potentially profit and, importantly, survive? Don’t chase yesterday’s stock market returns.
For a number of reasons, I had been looking forward to meeting former Dallas Fed President Richard Fisher. For years, he was one of the rare, few experienced business minds in the room. Does the Fed really understand how business works? I have some interesting comments to share with you about what it looks like behind closed doors.
Expect the next several weeks to be full of ideas and we’ll discuss probable outcomes. If you want to spend a few bucks, you can order a video replay of the conference sessions by clicking here. You’ll need to set aside some time, but I believe you’ll find it important for your financial health.
I walked away with a number of actionable ideas. I’m not sure about you, but it really helps me to put my headphones in and replay the audio recordings from the sessions. Putting it to paper also helps me and I hope you find it helpful as well.
As a quick aside, I wanted to let you know that we are now GIPS verified as a firm. We feel this is an important step. GIPS is a set of standardized, industry-wide ethical principles that provide investment management firms with guidance on how to calculate and report their investment results.
Although the adoption of GIPS is not mandated by regulation, it is considered best practice for investment advisors. We chose Ashland Partners & Company LLP to verify our policies and procedures.
“With all of the discussion regarding fiduciary standards, we believe it is only a matter of time before the GIPS standard is adopted industry-wide,” said CMG President, PJ Grzywacz. “Although many people understand GIPS to be a way to compile performance returns, it is much more than that. GIPS is not just about building performance composites. It is a representation of our commitment to provide transparency and build strong internal controls through our adoption of the policies and procedures that are the core of the GIPS standard.”
We are excited about GIPS. I can’t even begin to explain the amount of work required to achieve this verification. Please send me a note if you have any questions or would like to learn more.
I really hoped to send you more notes from the conference this week, but it has been four days of non-stop meetings with hardly a moment to write. Bear with me… more to come over the next several weeks.
I’m on a late plane home this evening with notes in hand. I’ll be reviewing them on the plane ride home. Much to digest. Actually, maybe I’ll get upgraded, have a glass of red wine and fall asleep. I like the travel, but really love heading home. It is nice to be heading home.
A long holiday weekend with Susan and the boys is ahead. Some soccer, some golf and maybe a trip to the beach if the weather holds. Wow – summer time begins.
John Mauldin with me at the conference:
Click below for a link to Wednesday’s Trade Signals post titled: You’ll find an interesting chart that shows the age of all cyclical bull markets since 1900. You’ll see that the current cyclical bull is aged, but can grow older.
Trade Signals: Extreme Pessimism Sentiment (S/T Bullish) Supports Market Rally, S&P 500 Index 2040 Support Level Holds. Here is a link to the Trade Signals blog page.
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Wishing you a fun filled holiday weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Chairman and CEO. Steve authors a free weekly e-letter entitled, On My Radar. The letter is designed to bring clarity on the economy, interest rates, valuations and market trend and what that all means in regards to investment opportunities and portfolio positioning. Click here to receive his free weekly e-letter.
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A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
Trade Signals History:
Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him. A number of years ago, I found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you in your investment process.
Following are several links to learn more about the use of options:
For hedging, I favor a collared option approach (writing out-of-the-money covered calls and buying out-of-the-money put options) as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out-of-the-money put options for risk protection.
Please note the comments at the bottom of Trade Signals discussing a collared option strategy to hedge equity exposure using investor sentiment extremes is a guide to entry and exit. Go to www.CBOE.com to learn more. Hire an experienced advisor to help you. Never write naked option positions. We do not offer options strategies at CMG.
Several other links:
http://www.theoptionsguide.com/the-collar-strategy.aspx
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