There are some things we do for clients that they don’t really know about. I am not complaining. We are supposed to do research, anticipate needs and take care of details so clients don’t have to think about these things as much. However, I thought it might be helpful to tell you about one of those background things we do. I just finished 3 days near San Diego at a very exclusive investment conference. It was about $3000 to attend, and it was non-stop presentations from some of the biggest names of portfolio managers and economists. My head is swimming with charts and graphs, and economic analysis. It will take me awhile to digest and internalize all that I heard, but I thought I would give you some initial reactions.
I should start with the fact that most of the economist and hedge fund managers were pretty upbeat about the investment opportunities, particularly in the US. Yes, there are absolutely challenges and dangers, but again, upbeat. In summary, there is a storm coming, but it looks a ways off for now. The major themes were concerns about China, Europe and Japan and how their separate problems might affect each other and the rest of the world. We also discussed the US and opportunities for real estate recovery and our mounting debt. While opinions were not uniform there were some thoughts:
The US dollar is expected to get stronger, partly because as the rest of the world falls into a slow down or recession, the US is still considered the safe port in the storm.
Japan is coming to an economic and demographic end point. This has been talked about and projected for some time, but they have over tripled the US rate of printing currency and their debt and their aging population is far worse than the US. The Yen is expected to fall by more than 25% to the dollar. One hedge fund manager is projecting economic implosion in 18 months, others said within 5 years. Time will tell, but the possibility has implications for the rest of the world and your money. Do you want to buy a Lexus cheap?
Europe is expected to have the most difficult time adapting to a currency-printing Japan. Germany in particular most directly competes with Japan for exports and the Euro has structure restrictions against direct printing of currency to remain competitive on price. The belief was that either Italy and France or Germany will leave the Euro. Both France and Italy have major recessions and possibly depressions in their near future.
Most of the speakers were not afraid of a “bond bubble” (increasing interest rates that can make bonds lose money). They thought bonds have limited upside and the yields will be small, but the concerns about dramatically increasing interest rates are overstated. In fact, when pressed for a favorite thing to own next year, 30 year Treasuries were a common favorite. We have looked at this trade and are having a hard time accepting this for now.
Emerging markets should be good places in the long term because of lowing interest rates, growing population and growing sophistication, but this could be a difficult market in the short term requiring very selective and an actively traded portfolio. China is starting a change from a fast growing, cheap producer of simple goods to being more self sufficient and a stronger influence in the region. This slow down will require less commodities.
We are in a secular bear market, which means occasional up markets in a general direction down. Prices need to come down significantly, or earnings need to significantly increase to complete this long-term super cycle.
US energy development in fracking, shale, pipelines, and sideways drilling is a bright spot and should help the US become increasingly energy independent.
There was a long discussion on the difference between Micro Economics (that is how families might spend money) and Macro Economics (how Governments and whole economies use money). The major point was you cannot draw conclusions from what’s good for a family to what’s good for a larger economy. For instance, it’s good for a family to reduce spending and save more, however, if everybody in an economy does this at the same time, the economy would fall into depression. This is called the paradox of thrift.
While traditional wisdom is that eventually interest rate increases by the Fed will stall the economy–this is not necessarily true. Small increases in interest rates, might actually spur economic activity, because it encourages people to action who think the good deals on interest rates are ending. If you were thinking about financing a house or a TV, it might not be cheaper now. A dramatic increase in interest rates past 5-6% statistically would likely produce a dramatically slowing economy.
Traditional understanding of controlling risk through regular diversification will have to change. This is part of the reason that we see the further use of alternatives and adaptive trading strategies. As the World Central Banks continue to distort basic economics, so will our understanding of what makes up conservative and aggressive assets.
Every week our trade team meets and reviews each client’s various holdings. A common discussion is do we start to protect and reduce risk in the portfolio. In today’s world it is difficult to know what assets provide safety we have a defined a process that regulates how we make buying or selling decisions. While personally and along with some clients we felt this market was in line for a correction, we stay true to our investment process which requires some support in that decision, either change in computer models, money movement with institutional money managers or changes in charting. On this Monday we saw some small changes. In response, we reduced some bond and stock exposure. We believe that the weakening of dividend oriented positions is temporary and that the Federal Reserve will not end its quantitative easing anytime soon.
Advisory services offered through EWG Elevate, Inc. dba Protection Point Advisors.
This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.