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What The Bears Still Left Standing Think

user profile picture Adam Taggart May 03, 2014
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It has been a busy week for Chris and me. We wrapped up our annual seminar back in western Massachusetts on Sunday, and then met back up together on Wednesday out in Sonoma, California for this year's Wine Country Conference.

This morning, we woke at 4:30am in order to get Chris to the airport on time for his trip home. And now it's time to start digging into the stack of work that's piled up while we were on the road…

But before I disappear, I thought I'd briefly share some of my takeaways from the past few days. The Wine Country Conference (WCC) is an annual gathering of speakers organized by Mike "Mish" Shedlock and his advisery firm, Sitka Pacific. This year's speakers included: John Hussman, Steen Jakobsen, Axel Merk, Mebane Faber, Chris, and of course, Mish himself. Our good friend Charles Hugh Smith attended, as well.

The event is intimate; perhaps about 40 paying participants, many of them money managers themselves. The price of attendance is one big reason why the group is so small – registration cost over $1,000. Why so expensive? Because the primary mission of the event is to raise funds for charity research; this year's focus was the Autism Society (the Hussmans are huge activists for this cause).

A benefit of the small size is the personal access it offers. Chris and I were able to spend a lot of time talking in depth with Peak Prosperity members that attended, as well as socialize at length with the other speakers, which was a real treat. Turns out, big brains are just one of the many gifts these guys have an unfair share of. Many of them have fascinating life stories, are really funny, and have hidden talents that came out during the event. For example, John Hussman — one of the most sophisticated data analysts I've met — is a heck of a guitar player. Chris and he jammed for several hours around the fire on Thursday night while John's wife, Mish and I provided our best background vocals.

Since we were in constant 'mingle' mode, I didn't have time to take lengthy notes during the presentations, but I did my best to capture the main thrust of each. There was a videographer in the room, and my hope is like last year, full videos of the presentations will eventually be made available. If so, we'll post them on the site:

Axel Merk
  • The global economy is over-indebted. Biggest problem: "too much debt"
  • What kills markets? Over-confidence. Market hubris is sky-high; volatility is very low.
  • Volatility is the enemy of leverage
  • Sees structural instability creating more volatility going forward. That will lead to higher interest rates, which will threaten to bring the over-leveraged economy to its knees
  • He doesn't expect more rounds of QE. Thinks Fed doesn't feel it can do that as most observers consider it a failure (i.e. helped .1% at expense of everyone else). But believes the Fed still has other tools, regulation, etc it can use (how effective they will be is up for debate)
John Hussman
  • Lots of amazing charts showing that future asset returns are highly correlated with 1) profit margins, and 2) price multiples (when these indicators are higher, 10-year future returns are lower)
  • Profit margins are at all time-highs + price multiples (to earnings, sales, etc) are sky-high
  • Models show that stock returns will be depressed for the coming decade: ~4.5% percent *assuming* ~6.5% in GDP growth. If GDP growth is lower, then stocks returns should be even lower….
  • In a nutshell: QE/etc has brought all future return value into the present. Either buy now and expect no/low returns for a decade; or better to wait for price correction, buy low and get appreciation
  • Charts show that a major market top is happening now
  • Time for "alternative investments" — i.e., those with little correlation to the stock market
Meb Faber
  • CAPE ratios help you determine whether a stock or market is under/over-valued
  • Can place additional filters over CAPE to narrow the focus & improve returns
  • In general, markets are at good CAPE levels
  • US overpriced on CAPE basis, but represents a majority share of most portfolios. Need to look outside US.

Steen Jakobsen

  • Very bullish for future of investing, BUT believes a clearing event is needed first. Sees it as a big deflationary event in the short term.
  • 2014 is about "as bad as it can get" for economic indicators
  • Expects them to get better in future (2015 on), starting a new bull market. Starts with an exponential recovery in stocks in the near term
  • BUT, sees world growth slowing down (Asia deflationary rebalancing, Europe anemic 'recovery', US dysfunction, etc)
  • Big fan of investing in SME's (small businesses), but short on details as to how
Mike Shedlock
  • Stocks at second highest valuation ever
  • Fed-induced asset price inflation (housing, education, health care, etc) is crushing productive classes/younger generation (data showing family formation is becoming compromised)
  • Gold undervalued (miners, too)
  • See yield curve now giving recessionary signals – looks like bond market is skeptical of future growth "story" and Fed's ability to 
  • Likes Treasuries, gold & Japanese equities
  • Doesn't like US stocks: recently went short the Russell 2000

Note that the speakers were not universal in their level of optimism/pessimism. Those with a more fundamentals-based view (versus using technical models) were more bearish.

Interestingly, all the above speakers pretty much just focused on the Economy "E". Chris, of course, brought resources into the discussion, which the other speakers were unanimous in agreeing added a critical set of additional risks to the macro story. (As Chris succinctly described it, he saw his role at the conference to "play the Lorax")

Great discussion was held on the developments in the Ukraine. Steen gave an excellent synopsis on why Europeans regard America's recent actions towards Russia as extremely misguided. Chris had a lot to add, as he's finishing up an important report on the topic. It should be ready for publishing this weekend.

And now, back to re-introduce myself to my family…

Have a great weekend!

cheers,
Adam