SIC 2019: Day 2 Recap

SIC 2019

Panel at SIC 2019

The second day of SIC 2019 featured a range of opinions on the markets from extremely bearish (David Rosenberg) to modestly bullish (Doubleline’s Jeffrey Sherman). Specific trade recommendation included long treasuries (Rosenberg) and long-dated US bonds (Lacy Hunt). Louis Gave and Jeffrey Sherman were both bearish the dollar, with the former concerned about inflation and the latter the twin deficits. A full recap of the day’s notes are here below:

David Rosenberg

  • Recessions follow fed tightening cycles of 300 basis points or more.
  • Fed has overtightened. I have the evidence.
  • Neutral nominal fed funds rate is closer to 1.5%
  • There will be a price to be paid for this.
  • Fed has overtightened by 75 basis points.
  • Money growth has vanished.
  • Leading economic indicators in downtrend. OECD lowest since 2009.
  • Where is the bubble? Greenspan: We have an equity bubble and a bond bubble.
  • Schiller P/E is still over 30. Only two other times has this happened. This is a 2 standard deviation event.
  • San Fran Fed: Zero Real Returns for a Decade.
  • Stock market has only 40% correlation to the economy.
  • Nominal real GDP in this bull market weakest in history.
  • The boom in earnings has been a buyback story.
  • Share count has been depleted this cycle.
  • Stock buybacks growing 6x the rate of capital spending.
  • Public stock market trading more like a commodity with supply going down.
  • Debt bubble this time is not about the banks or household balance sheet. We have the most overextended corporate balance sheet in history.
  • Record amount of corporate debt coming due.
  • We are more than 90% of the way through the current economic cycle.
  • The employment rate is a great contra indicator for any asset manager.
  • The cycle has a bullseye on its forehead sometime in 4Q.
  • 13 Fed hiking cycles; 10 landed in recession. Low odds that we are going to come out of this with a soft landing.
  • Recession probabilities are increasing. Risks are elevated and rising.
  • The Fed doesn’t see recessions when it is staring them in the face.
  • This is a period where you want as much liquidity as possible.
  • Emerging markets are a place where you can’t emerge from in an emergency.
  • Buy volatility. Have some cash. Long duration bonds.
  • Biggest conviction call is on the treasury market. Core inflation is down to 2%. We have never peaked at such a low level.
  • Fed has very few conventional policy bullets left in the chamber.
  • Very bullish on treasuries no matter what. That is the placed to be.
  • Secular bull market in bonds is not over.

Peter Boockvar

  • Fed interest rates is THE story.
  • Stock market extremely sensitive to interest rates. Stock market has plunged with every rate hike.
  • Avg credit card rate almost 17%! Once rates got to 16.5%, demand fell. ROC in retail sales fell.
  • Savings rate also plummeting.
  • Sales of existing homes has topped out.
  • Refis have declined by 75%
  • 40% of Russell debt is floating rate. As LIBOR increases, small caps faces rising costs.

Lakshman Achuthan

  • Business cycle’s demise greatly exaggerated.
  • Not uncommon to have extended business cycles (globally). Multi-decade expansions not new.
  • US in its 4th growth rate cycle downturn since the Great Recession.
  • The ratio of capitalized profits to GDP super sensitive to interest rates.
  • US Future Inflation Gauge turned down in early 2018. Remains in cyclical downturn. Upturn not yet in sight.

Jeffrey Sherman, DoubleLine

  • Title: “Debt Rules Everything Around Me”
  • Global growth slowing but recession not imminent.
  • Global Manufacturing heat map starting to turn red in early 2019. Hiccup started around March.
  • Trade war is going through Germany right now.
  • Eurozone economic weakness; everyone is growing slower than they were 12 months ago. Doesn’t mean recession, just means slower growth.
  • Hard economic data turning up, but sentiment has not improved.
  • Industrial production and manufacturing off the highs, but not saying recession is imminent.
  • US Business and Consumer sentiment still strong.
  • Housing market is showing signs of weakness. Interest rates play a role. Pockets of weakness in certain cities. Housing market up 17-18% over the last 5 years. Some slowing not unexpected.
  • Goods not experiencing inflation. (Tariffs could change that.) Services are experiencing inflation.
  • US Total job openings higher than total unemployed.
  • Market does not believe inflation is coming. Breakeven price (spreads) below 2%.
  • Bond market is really good at predicting Fed hikes. 3-month LIBOR rate good indicator of future rate hikes (3-month lead time).
  • Corporate bonds most overvalued in history relative to treasuries.
  • On a relative basis I like EM Corporate debt over High Yield Corporate
  • Corporate debt/GDP at all time highs.
  • All of the growth came through an issuance of debt.
  • US Twin Deficits vs USD: When deficits increase, tends to be bearish USD. Doubleline is bearish dollar in short to medium term because of twin deficits.

Lacy Hunt, Hoisington

  • There is an insufficiency of saving out of income. We simply do not have the savings to absorb ever larger Federal budget deficits.
  • $3T in debt will be added over next 10 yrs because of tax cuts, and increase in spending, etc.
  • US not as far along the diminishing returns curve of GDP output per dollar of debt issuance. (Bad on an absolute basis, good on a relative basis.)
  • Velocity of money falls if you do not generate an income stream sufficient to cover principal and interest.
  • Population growth correlated to the marginal productivity of debt
  • In the next 5/10/15 years the US will be relatively stronger when compared to China, Japan, Europe because of marginal productivity per capita.
  • We have reduced excess reserves by 40% to the same level after QE1.
  • Money supply growth has decelerated sharply; in the lowest quartile historically.
  • Money velocity turned down again in Q1; in my view monetary velocity will continue to decline as debt deteriorates.
  • The Federal Reserve created more liquidity in the international markets than in domestic markets.
  • World USD liquidity declining at an unprecedented rate.
  • The velocity of money is declining in the United States.
  • Synchronized downturn in Real GDP globally; specifically in semiconductors; in autos, as example.
  • World trade volumes down.

Louis Gave, GaveKal

  • “What is the threat of inflation out there?”
  • Yellow jacket revolt started as the result of higher gas prices.
  • US will never have a budget surplus under present conditions because of demographic headwinds.
  • The US must print money to fund unfunded liabilities. That is the short dollar thesis.
  • Portfolio construction in inflationary times much more challenging.
  • Inflation is not a zero probability outcome.

Panel on China’s Economic Outlook

  • Kyle Bass: Impossible to trust China in any capacity
  • Louis Gave: China must grow more slowly because the migration has to major economy is already happened. Long Chinese bonds is the story – outperformed all other bond markets
  • Simon Hunt: believes in the desire of the worker to earn more to spend more
  • No one thought a trade deal with China will be done. $300B in trade is inconsequential for two economies worth $34T combined.

Panel on Europe’s Economic Outlook

  • Gave: Italy is the one country where not everyone is bought into the European project. Italy decentralized. Italian elites have been killed by the Euro
  • Zulauf (Germany): Germany is economically the strongest but very vulnerable. EU was a great idea until they introduced the Euro. Creates imbalance. Germany created a deflationary time bomb because of misconstruction with Euro.
  • 30% of German workforce will retire in next ten years; negative interest rates creates impossible actuarial model for their retirement, hence savings have increased and created further economic pressure.
  • Jim Mellon: German bunds are the greatest short we’ve ever had since the second World War
  • Zulauf: Ideal solution is a decentralized European Union. My theory (fear) is that Europe will move towards increasing centralization
  • Jim Mellon: UK is outright buy; one of the cheapest markets in the world. Pound undervalued.
  • Gave: Of all the major markets, UK is the one screaming ‘bargain.’ Of the European problem, Germany will be the one left holding the bag.
  • On Euro – Gave: Not a short because pretty cheap; but not a buy either.

About the author

I am the founder of and an avid trader. I am also the co-founder of Texas Precious Metals, a top US precious metals company. In 2006 I was a contestant on The Apprentice with future president, Donald Trump. I live in Coeur D'Alene, Idaho, with my wife and five children, where I spend my time hiking, charting, and changing diapers.

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