Ten key thoughts from the third (and final) day of SIC 2015

So what did day three of the Strategic Investment Conference 2015 bring?  It may only have been a half a day but it was as completely fascinating as the first two full days of the conference (for which you can find my write-ups here).

1. Bill White summed up the current global macro situation by repeating the old joke 'if I were you, I wouldn't start from here'.  

2. On China Michael Pettis noted that 'the people who really know what is happening are not talking' and that 'it is brutally difficult to bring consumption up'.  Nevertheless a 'perfect adjustment for China is 3-4% (growth)...for household income 5-7%' and that investors must understand that the choices are between a hard landing incorporating successful microeconomic reform and a soft landing followed by a very hard landing.  

3. On the issue of global liquidity Raoul Pal observed big potential liquidity problems as 'the numbers are too big for the system to deal with' and raised the interesting point that 'is Citadel* a weak or a strong hand'.

4. Debt - 'when you have excessive levels of debt you don't grow' observed Michael Pettis, a sentiment shared by Bill White: 'the bigger the debt before the crisis, the bigger the fall out after the crisis'. Michael Pettis did also note that 'the answer to when there is too much debt is when the market thinks so'.  

5. Concerning growth miracles Michael Pettis said that 'in these growth miracles, the pessimists always get it wrong...they are not pessimistic enough'.  Bill White thought that 'no-one is interested in history any more' and that even the Bank of International Settlements did not have 'an enormous amount of optimism'.  

6. Financial sector thoughts - John Mauldin thought that matters such as negative bond yield was inducing a 'hole the size of Texas' in global insurance companies.  Raoul Pal thought that the banks were in a 'worse shape than we could imagine'.  

7. Turning to democracy and markets, Michael Pettis mentioned that China's 'anti-corruption campaign all about the centralisation of power'.  He also observed that countries with more ingrained democracy like India may not ever have a growth miracle but that it would be far more sustainable. Bill White noted that 'a promise is a promise...but on the other hand it is just a promise'.  Raoul Pal talked about the likelihood of wealth distribution and a risk of 'simple law changes...(like) pensions have to own government bonds' 

8. Emerging markets - Bill White thought there were more dangers than in 2007 'as now the emerging markets are part of the problem'.  

9. Next steps?  John Mauldin thought the key is to 'create incentives...the key is to take the focus off monetary policy' and suggested flat taxes, legislative/regulatory simplification and a balanced budget. Bill White believed that 'delay becomes the default option' and that the changes have to come from government as central banks cannot solve insolvency.  

10. And a final word...John Mauldin noted 'hubris of man' but that 'if we get through this...it will be phenomenal'. A good sentiment to finish up these notes.  

Will I be back for next year's conference?  Absolutely: in my view if there was only one global economics/investment conference to attend then it would be the SIC.  Very highly recommended.  Now I have got the small task of translating the multiple thoughts and insights heard into the rest of 2015 and beyond practical investing thoughts and actions.  

* a large global hedge fund 

Ten key thoughts from day 2 of SIC 2015

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

Ten key thoughts from the first day of SIC 2015

Fascinating first day at the Strategic Investment Conference 2015 (link here).

Looking at all my notes and thinking through all the conversations I had here are ten key takeaways (in no particular order) and matters to think about from my perspective:

1.What the Fed does next - There are 'lots of things to be worried about...but the Fed is not one of them' observed David Rosenberg who cited evidence that the US indices tend to fall after the last interest rate rise.  Paul McCulley noted that the Fed is 'paid to be late...as once they get off zero they want to stay off zero'. 'Monetary policy is ineffectual if not negative' said Lacy Hunt noting the velocity of money continues to fall. Jim Bianco put the chances at 50/50 that the US gets more QE if the stock market falls by 10%.

2. The required mindset - 'Professionally i need to fall apart to make money' said Peter Briger whilst David Harding opines that 'everyone knows leverage is the route of risk'.  Meanwhile Louis Gave believes 'money managers are paid to adapt'. Thoughts which then leads you to...

3. ...theoretical opportunity set - Specific rather than general opportunity was seen by Peter Briger as 'everything we are doing is idiosyncratic'.  David Harding cited historic managed futures data showing that 'everything is much, much better than the US stock market' which 'defied explanations of an efficient market'.

4. Bonds - 'I wouldn't buy any bonds' said David Rosenberg highlighting 100% of supply being purchased by 'non-price entities'.  Meanwhile Peter Briger noted 'credit sucks'.  Lacy Hunt however thought that the US Treasury market is likely to be next decade as 'deflation changes the rules'.  Paul McCulley put fair value of 10 year Treasuries at around a 3% yield.

5. Earnings season is warped in the view of Jim Bianco who noted that there was even a 58% proportional beat in Q408.  Acknowledge that numbers are lowered to 'beat' and you will be a better investor...

6. Trade and related - The recent sharp FX moves pertained to 'beggaring' trade partners observed Lacy Hunt cited comparisons with the inter war years

7. On distressed energy opportunities both Peter Briger and Jim Bianco noted many people - too many people - were awaiting opportunities to invest.  Louis Gave noted that the corruption crackdown and Russia's below market deal with China both helped induce the violent shifts of energy markets in the last year.

8. International investing - Louis Gave said that 'China will double and you have nothing in your portfolio' and hence 'every index fund in the world is going to chase its tail' meanwhile 'the one big underweight you should have today is the US' and the big recent move of the Chinese markets means 'all of you are being front-runned'.

9. Longer-term predictions - The end game for Central Banks is inflation mentioned David Rosenberg.  Paul McCulley observed that his 'biggest forecast for the next 5 years is that public investment will cease to be an oxymoron' and that there is not a shortage of savings / budget deficit expansion capability to fund this.

10. Tactical observation - Jim Bianco made the excellent point that after poor Q1 data 'anything data starting with "April"' is going to be of huge interest.

Now the challenging job of extending these intellectual capital insights into active investment thoughts and choices...  I am sure that day two on Friday will be just as interesting and useful.