I attended John Mauldin’s annual conference in Dallas in late May. Recall Mauldin writes Thoughts from the Frontline, a free weekly investment newsletter that I have referenced before. It really is excellent and his conference is chock full of big name macro strategists, economists, and geo-political experts. It runs from 8AM to 6PM for three days and has been described as like drinking from a fire hose.
It does tend to have a bearish tone and this year was no exception. The takeaway was more concern about slowing economic growth (secular) and the drag from too much debt globally. Negative interest rates were top of mind as was rising geological risks. I stopped counting how many times Donald Trump was mentioned – and not in a favorable light! That guy just takes up all the oxygen in the room and the media can’t get enough of him.
Needless to say, oil is critical to Alaska and the news from the conference was mixed. Most believed that it would trade around $50 to $60 as the economics of the US frackers put a ceiling on prices. Globally, it may be a “sweet spot” as its low enough to give consumers a boost and yet high enough to avoid disaster in the oil patch. Unfortunately, we need a lot higher price to balance the budget here in Alaska.
A few speaker highlights included:
Chief Economist and Strategist for Gluskin Sheff, David Rosenberg, who shared why he thinks the debt deleveraging cycle is only beginning. The panic of 2008 has changed behavior with people saving more and being more careful with spending. He thinks the economy remains tepid, rates will stay low and taxes are going up (he even mentioned a “wealth” tax!). He believes “helicopter money” (something APCM’s Brandy Niclai just wrote about) will be tried in Japan within a year.
Former Dallas Fed President Richard Fisher commented on why protectionism “is the crack cocaine of economics.” There was concern at the conference about backsliding on free trade and capitalism in general as rising inequality, fragile job security, and slow economic growth provided fodder for “populist” candidates.
In so far as the US election was concerned the fact that the polls have tightened between Clinton and Trump probably overstates Trumps chances according to FOX News Juan Williams. He thinks Hillary still has a comfortable lead in the Electoral College, and that’s what counts.
Geopolitical strategist George Friedman offered that the world was going to hell, but the US was an island of stability (we buy our own stuff). He believes the Chinese public is getting restless and that worries President Xi Jing Ping (who just named himself head of the army). The government there is terrified of unemployment. Friedman thought the Italian banks were in big trouble. He likes Mexico a lot where the cost of production is now less than it is in China.
The folks from Gavekal were more bullish on China noting that equities were trading at 7x earnings and that dividend yields were 4.5%. Much of the “bad” news is in the market. The economy is slowing but not falling off a cliff!
China wants to be an empire again. Thus the one belt/one road new Silk Road project and the establishment of the new Asia Infrastructure Investment Bank – bigger than the World Bank!
Anatole Kaletsky went through an interesting exercise thinking about political risks and the negative market consequences of President Trump (protectionism), Brexit (a precursor to an EU breakup) and Angela Merkel (loses in Germany on immigration concerns). The betting markets put the odds at each happening at around 25% which means there is a 58% chance at least one of them occurs. Anyway, I thought it was clever to use probability theory this way. He does not think these events are “in the market.” It would be a shock.
James Grant is a bit of a gold bug and rejects the notion of speculating in gold but rather thinks of it as an investment in monetary confusion! Gold does do well when confidence is low and uncertainty is high.
As always, there was much more to chew on. But as my grandmother once said “I’ve worried about a thousand things in my life, most of which never came true.” Fight the pessimism. It pays to be optimistic more often than not.
Have a great week everyone. Opening day for the Alaska summer baseball league is this Wednesday when the Pilots play the Bucs.
Jeff Pantages, CFA®
Chief Investment Officer