Conference Takeaways
Part Deux
“A Bubble in Complacency”
May 29, 2014
By
John E. Montgomery
Managing Director & Chief Investment Officer
Capital Fiduciary Advisors, LLC
4720 Montgomery Lane, Suite 650
Bethesda, MD 20814
301-652-6951 (phone)
301-652-6954 (fax)
[email protected]
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J
ohn Mauldin entitled his summary of his Strategic Investment Conference, “A Bubble in
Complacency.” As mentioned in CFA’s Conference Takeaways dated May 19 th, “Five
years of a non-stop bull market has culled the bearish herd.” When I spoke with Mauldin,
he readily admitted a far more bullish crowd than in recent years and in his summary pointed out
to the old glass half full/half empty analogy and pointed to a softening in even the most
vehement of the bearish arguments at the conference.
When one looks at the current
complacency in this stock market as measured by the VIX, his “bubble in complacency” is easily
seen.
Let’s first take a look at the bearish arguments which are well known. Richard Yarmone,
who is the senior economist of Bloomberg Economics, was introduced as “Lord Vader.” He
pointed out that every time U.S. GDP growth slows to 2% or less the U.S. enters recession and
that we are heading, in fact, for “hard times.” In general, nothing new. Dylan Grice, who
manages the assets of one of Switzerland’s wealthiest families, was concerned that Central
Bankers do not really know what they are doing and are underestimating the law of unintended
consequences. He feels (I agree) that there is inflation in financial assets and that monetary
debasement (QE) has always and will always, ultimately, fail. Grice feels that avoiding the
really big mistakes is his primary responsibility and, therefore, large holdings of cash and some
exposure to gold are prudent. He recommended large companies that generate more cash than
they need and have strong balance sheets allowing them to pay growing dividends and do buy
backs and, ideally, operate in quasi monopolistic businesses.
Jonathan Tepper of Variant
Perception felt that the Fed and other Central Banks have been very successful getting investors,
to take more risk, even though they really don’t want to. He is bearish on consumer spending,
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believes that there is a growing credit bubble and that inflation will be rising soon.
Jeff
Gundlach (of DoubleLine and formerly TCW) admitted that he really had no strong belief as to
what the U.S. economy will do but was very bearish on the housing market. He believed that
corporate bonds, bank loan funds were overvalued and is very cautious on junk. He, like Van
Hoisington, is bullish on U.S. Treasuries. Speaking of which, Lacy Hunt, of (Van) Hoisington
Investment Management, gave the most bearish presentation pointing to the excessive levels of
non-productive debt in the global economic system. He, like we, feels that trying to solve
overleverage by more borrowing is foolhardy. He pointed out Fed tapering is likely to continue
since quantitative easing has been ineffective if not counterproductive. He likes long U.S.
Treasuries and not much else.
The most raging Bull was David Zervos, Chief Strategist of Jefferies & Co, who felt that
the Fed would continue to do whatever it takes to reflate the economy. He feels that cash is the
enemy of portfolios since it yields nothing and is being debased. He admitted in the Q&A that
nobody knows how this will end well but felt you “gotta believe” and to buy American. Recent
bull convert Dave Rosenberg, of Gluskin Sheff, said there is a 0% chance of a U.S. recession
anytime soon and feels that we are at roughly mid-cycle for both the economy and stock market.
He sees positives from commercial bank lending and from consumer spending since he feels
wages will be increasing. He especially likes hard asset stocks and Canadian banks. The oddest
and most recent convert to bullishness was Gary Shilling who’s been positive on bonds (i.e.
negative on almost everything else) for longer than I can remember. He argued that now that
virtually everyone agrees that slow growth will continue, rapid economic growth is likely to
resume. He is in “the U.S. is the cleanest shirt” school of investing. Anatole Kaletsky of
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Gavekal is another recent convert to stock market bullishness. He believes that, since we are
now in one of the longest bull markets ever, we may have entered a structural bull market even
though he felt we might have another cyclical bear market. Thanks!
According
to
him:
“Japan is done, and Europe is done.” The U.S. continues to be the global 800 lb. gorilla so buy
U.S. but also buy into emerging markets based on low valuations and even lower sentiment
towards them. His presentation was not at all similar to Gavekal’s generally bearish recent
reports. Lastly, there is a special place in the bears’ hell for bullish, liberal, Keynesians like Paul
McCulley (formerly and more recently again of PIMCO) who believes that the economy will get
(maybe much) better due primarily to QE and deleveraging. He also feels that rich people, who
have benefited the most from easy monetary policies, should pay more taxes! This was not a
very popular opinion among the 1%ers in attendance.
There were also lots of politicians and generic pundits who spoke so we’ll end with their
(not-always-so) special insights. Surprisingly, Newt Gingrich was fun and interesting…who’d
have thunk it? He is very positive on the private sector and free markets but only if the “prison
guards” (politicians and regulators) can be reigned in.
Similarly, Stephen Moore, of The
Heritage Foundation, felt that the U.S. was one election away from an economic boom. (We
doubt he thought it would be this year’s election.) Ian Bremmer of the Eurasia Group and
historian Niall Ferguson of Harvard felt that as the U.S. reduces its role on the global stage,
geopolitical risks will supplant economic risks as the greatest concern to investors. (Ironically,
emerging markets are rising recently right along with geopolitical risks.)
Bremmer was
surprisingly positive on the outlook for Iran and Syria. Ferguson wasn’t very positive on much
of anything and warned of an Obama geopolitical “taper.”
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In all, the Strategic Investors Conference was very interesting. My only complaint is that
there were few specific actionable investment ideas. I’m hoping that John Wolff lets me go
again next year. San Diego is très bon.
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