After a phenomenal day one (link here) it was hard to believe that day two could compete...but it did. Here are ten thoughts from day two of the Strategic Investment Conference 2015.
1. Fascinating inflation/monetary policy discussions. Larry Meyer observed that 'if we had a higher inflation objective (c. 4%) we could use monetary policy more effectively'. Stephanie Pomboy believed the current economic 'logjam' could only be broken would be 'to persuade people that inflation is coming'. David Zervos worried that Germany could pull European QE early as inflation picks up.
2. Europe - George Friedman urged everyone to 'stop thinking of Europe as a united entity' and that via Germany 'the (economic) black hole at the heart of Europe' and implosion almost inevitable. Ian Bremmer believed that the 'transatlantic relationship' was at a 30 year low as Germany preferred bilateral commerce deals not geopolitics. David Zervos thought that Europe's 'supercharged QE with negative rates' was hugely bullish and that you invest 'where the strength is: the Germany economy' and hence the 'double D trade: DAX/dollar' (because QE also tends to weaken a currency).
3. On geopolitics Ian Bremmer observed they are 'unstable and dangerous...a period of geopolitical conflict'. Russia is 'in decline' but shorter-term a 'black swan', the Chinese AIIB is a Marshall Plan equivalent to push influence, a more technocratic Brazil would eventually emerge. The biggest problem for the US? 'Trust with allies...question mark of America is a problem...even for Canada'.
4. The case for selected emerging/frontier markets was wonderfully put by Grant Williams/Raoul Pal based on macro variables, observations like the importance of the US$6k+ per capita income level for democracy and specifics on Ethiopia ('the next frontier'), Iran ('a country that blew me away') and Morocco ('it is all about Algeria'). On the Middle East Ian Bremmer thought it was 'impossible to look today and be optimistic' but Iran was 'more attractive...80% chance of signing the deal...(but this was) different from getting a deal done'. He name-checked Kenya, Uganda and Ghana as African economies to like. Kyle Bass observed that Argentina remains very interesting especially after they change the President and do a deal with creditors. He noted that strong demand for a YPF corporate money raising recently.
5. Larry Meyer believes that today's equilibrium fed funds rate is 3.5% and that 'they want to go...(but) they kind of look behind the curve'. Meanwhile Jeffrey Gundlach thinks that the Federal Reserve won't 'raise rates this year...growing thought allow the economy to run hot' especially as using eurozone methodology helps put US CPI lower...
6. Bonds - Jeffrey Gundlach mused over whether c. 2019 is a big high yield bond storm due to mass rollover then, rising cov-lite positioning and that '100% of the time' high yield underperforms when rates go up. Kyle Bass thought that being short European credit made a lot of sense (in his case predominately via the swaps market).
7. On the US dollar Jeffery Gundlach said that 'currency trends usually last 10 years' and that tactically on the DXY ($ trade weight) he was looking for the 93 level to go long/longer. Stephanie Pomboy worried about fading foreign demand for Treasuries and concluded that she wanted to 'express my dollar bearishness with gold'. Ian Bremmer thought that there would be a 'geopolitical premium for the US dollar and US assets'.
8. Mistakes: Jeffery Gundlach noted mentioned that Australia, South Korea, Sweden and Norway among others erroneously raised rates a few years back only to reduce them substantially more recently. Grant Williams worried still about complacency and the scope for human error and hence noted that 'he fully expected to see QE4, QE5...the Japanese are on QE12'.
9. Interesting statistics: Grant Williams/Raoul Pal noted that the growth of the emerging markets means port infrastructure needs to go up x2.5 times to meet demand. Jeffrey Gundlach mentioned the easy-to-remember January '15 30 year bond low of 2.22%. Ian Bremmer observed that Iranian cyber capabilities were far more potentially disruptive than their nuclear hopes. Kyle Bass noted that if oil stays where it is then the scope for a 2%+ bump in annualised inflation in a year or so could cause disruption.
10. Federal Reserve meeting reality -Based on his direct experiences Larry Meyer said that 'Chairman (Yellen) is a consensus builder...speaks for the committee'...unlike the Greenspan run Fed which he participated in.
Really looking forward to the final half day of the conference which also packs in some greater speakers and thinkers. The write-up on this to follow