Joining hosts Erik Townsend and Patrick Ceresna is a man that needs no introduction, investing legend, Jim Rogers. Jim has become one of the most popular macro thinkers of our time. Those not familiar with Jim, back in 1973, George Soros and Jim Rogers founded the Quantum Fund. During 1970 - 1980, the portfolio gained 4,200% while the S&P advanced about 47%. The Quantum Fund was one of the first truly international funds.
In an exclusive interview on MacroVoices.com, David Rosenberg, Chief Economist & Strategist at Gluskin Sheff, discusses his views on Trump, inflation expectations, the Fed, the U.S. Dollar, Bonds and Stocks. Some of his most interesting observations are his views on bonds and the 35-year secular bond bull market. Bond gurus like Bill Gross and Jeffrey Gundlach have suggested that the bond bull market may be over, but David has a much different view. Here are some highlights:
MacroVoices interview with Real Vision Television co-founder Raoul Pal
Key excerpts in attached article:
- compares the VIX contango trade to the portfolio insurance problem that was blamed for the 1987 crash
- they don't realize the rate of change of the VIX can be so extraordinary that the losses can mount up massively and super quickly
- record level of speculative long positions in the oil markets compares to the conditions in the summer of 2014 prior to the bear market decline
- The other thing was speculative position in crude oil was all time high in fact if I took the trend going back from the early 80's it was seven standard deviations above that trend and well over three standard deviations maybe four standard deviations from the trend in the last 20 years or 15 years.
- I've seen a similar situation with copper driven by China and a few other things where copper position is wildly extreme and so I start to think well too much reflation is priced into these things maybe there’s an interesting opportunity on the short side
- What is interesting oil volatility has been coming lower. Look, I don't think it's going to get back to where it was in 2014 when it was trading below 20 but it has come down from a peak of 80, a kind of a real trading range of 50 down to 30. If it comes any lower the ability to buy options start to make sense because oil volatility can go to 80 can go to a 100
Ceresna Comment: Ray Dalio wrote an article reflecting on the Trump Presidency(click to read). His initial view: Our very preliminary assessment is that on the economic front, the developments are broadly positive—the straws in the wind suggest that many of the people under consideration have a sufficient understanding of how the economic machine works to run reasonable calculations on the implications of their shifts so that they probably won’t recklessly and stupidly drive the economy into a ditch.
On the other end, Bill Gross has taken a much more concerned view of the situation. (click to read). His view centers on the idea that the populist movement is only beginning and that Trumps policies do not address the big picture headwinds of demographics, technological displacement, deglobalization and overleveraged balance sheets.
I have to agree with Bill Gross on this one. Trump cannot undo the global debt cycle that needs to deleverage. While this may not be immediately bearish, I do feel that the short-term optimism will have a reality check as soon as all the dumb money finishes its panic buying.
Ceresna Comment: Important article written by Michael Lebowitz highlighting the flaws in passive investing using indexing. I would summarize that as indexing becomes more popular, the more it will distort the market pricing and increase the risk to those believing it to be a conservative strategy. The more the public pours into the strategy, the more likely it is to be the epicenter to the next major market event. The smaller and smaller the active management sector gets, the more likely that there will be considerable opportunities presented to the few dinosaur managers left using bazaar voodoo techniques like bottom up value investing.
JP Morgan's Nikolaos Panagirtzoglou:
Markets become more brittle, risky: "The shift towards passive funds has the potential to concentrate investments to a few large products. This concentration potentially increases systemic risk making markets more susceptible to the flows of a few large passive products."
Crashes, when they happen, will be bigger and badder: "the shift towards passive funds tends to intensify following periods of strong market performance as active managers underperform in such periods of strong market performance. In turn, this shift exacerbates the market uptrend creating more protracted periods of low volatility and momentum. When markets eventually reverse, the correction becomes deeper and volatility rises as money flows away from passive funds back towards active managers who tend to outperform in periods of weak market performance."
Markets become less efficient: "if passive investing becomes too big, potentially crowding out skilled active managers also, market efficiency would start declining. In turn, this would present opportunities for active managers to extract arbitrage profits."
Ceresna Comments: The mainstream wealth management firms and the advisors that represent them firmly stand by the “Buy and Hold” mantra. This stance is firmly entrenched in modern portfolio theory. The idea that risk can be diversified away by owning a basket of uncorrelated assets. These models are anchored in the world of academia. This is the same world where negative interest rates and efficient markets make sense. The problem with models is that they must make assumptions to be able to be able to be computed. The problem is that these assumptions are unknowable and dynamically changing. The truth is that the markets adhere far more to behaviour finance than fundamental rigor. Investors are risk adverse and losses hurt. When investors endure losses, they lose the appetite to stay the course and often seek change or to stem further loss.
Topics: buy and hold
Ceresna Comment: The shortage of U.S. dollars globally has forced many central banks to start liquidating U.S. Treasuries to suppress the dollar rally. We believe that this is the single most significant macro event today. I think the question asked in the article below is quite relevant - "One wonders how much higher the USD will jump if and when China decides to halt its selling of US paper, and how much lower the Yuan will then tumble in response, leading to even faster capital outflows from China?" I would further add, the price suppression can only be sustained for so long. The only easy solution is for the Fed to provide liquidity, but as one can see, they are stubbornly focused on tightening.
Insults, invective and pandering have been poor substitutes for serious debate about the direction in which this country is going — or should be going. And a sound and sustainable fiscal structure is a key ingredient of any viable economic policy.
Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II.
Bank of America's Savita Subramanian issued an overnight note titled "Is it about time for a recession?". In the note, is suggests that they found evidence for an imminent recession. Suggesting that if data were to continue to weaken in line with the recent pace, history would point to a recession in the second half of 2017. Further explination suggests that not every bear market coincides with a recession, but the most painful ones do. But my favorite part is that they caution Bank of America's long-term oriented investors from going to far in reducing their equity exposure suggesting that unless you can pinpoint the peak of the market within a 12-month timeframe, you are typically better off staying invested.
Ceresna Comment: Let me summarize. There is risk and a lot can go wrong and it is imminent. But don't worry, just buy and hold for the long-term. Thanks for the advice Bank of America, but I think I will let you and your clients hold the bag on the way down.