Speaker Summaries From John Mauldin's 2018 Strategic Investment Conference

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Posted by Mauldin Economics

on Friday, 09 March 2018 06:45

The renowned financial expert John Mauldin who put together this conference has sent out this summary of the thinking of 14 different analysts as well as the forecasts of both Biotech and Crypto Currency panels. Interesting thoughts, well worth reading - Robert Zurrer for Money Talks

Crypto-PanelDavid Rosenberg

For the 10th year running, Gluskin Sheff Chief Economist and Strategist David Rosenberg was the leadoff hitter at the SIC—and he had a warning for investors.

Rosenberg believes that the US is in the very late stages of the business cycle and that investors should now be de-risking their portfolios. He suggested that investors should be focusing on companies with high earnings visibility and low debt ratios.

On the macroeconomic level, Rosenberg said that long-term deflationary trends such as adverse demographics and high debt levels are stronger than ever. Given these trends, he thinks that the current uptick in inflation is little more than a transitory spurt and will soon fade away.

Finally, Rosenberg said that Gluskin Sheff, which has $9 billion in assets under management, recently moved to 25% cash across all their portfolios.

Louis Gave

Up next was Louis Gave, CEO of Hong-Kong based Gavekal. Gave has consistently been one of the highest-rated speakers at the SIC, and he didn’t disappoint with some unique insights into what is happening in China.

Gave pointed out that China is currently going through a huge economic paradigm shift, one which has profound investment implications.

For the past few decades, the incentive in China has been to grow as quickly as possible. But going forward, China’s incentives will be based around what President Xi Jinping has called a “Beautiful China.”

This means a more sustainable growth model with less use of materials such as concrete and coal.

Gave believes that this shift plays into China’s imperial ambitions—and that’s a trend he is investing around. He went on to suggest that investors should be looking at Chinese financial and consumer stocks, plus countries that will benefit from the One Belt, One Road infrastructure build-out.

Global Investing Panel

The first panel of the SIC 2018 was a discussion around global financial trends with David Rosenberg, Grant Williams, and Louis Gave.

The first topic of discussion was the recent tariffs enacted by President Trump. Gave said he has opened a “Pandora’s box” for international relations and the tariffs could have a serious impact on the financial market.

The panel also discussed gold, with some split views on the yellow metal.

Gave said he doesn’t like gold as an investment but that he looks to it as a signal that emerging markets are growing. On the other side, Grant Williams suggested that with inflation picking up, now is an excellent time to own gold.

On the issue of international relations, when asked if they were worried about North Korea, all three panelists said no.

However, Gave and Rosenberg agreed that growing tensions between Saudi Arabia and Iran are reason for concern. Gave commented that if the tensions turn into a greater issue, oil prices could jump.

Patrick Cox, editor of Mauldin’s Transformational Technology Alert, and Karen Harris, managing director of Bain & Co’s Macro Trends Group, opened the show after lunch.

Cox said he sees a perfect storm brewing. The impact current anti-aging and life-extension research will have on society is almost something out of science fiction—but it’s actually happening. And it’s coming a lot sooner than most people think.

Although Millennials are about to outnumber Baby Boomers, the old-age dependency ratio—the number of retirees being supported by young workers—is rising. The young are paying the bills of the old. Will they rebel against this intergenerational problem?

Healthcare is driving growing budget deficits and medical costs. Regenerative medicine is the only answer, Cox said. He believes that this imperative will drive radical regulatory change and get these drugs and therapies to market far faster.

Biotech Panel

Eric Verdin, president and CEO of The Buck Institute for Research on Aging, showed how genes control lifespan. Research from the Buck Institute points to the impact of gene mutation on longevity. In his argument, he drew on lab results that produced a 35% life extension in mice.

Michael West, CEO of BioTime, talked about how the lion’s share of healthcare costs is spent fighting chronic diseases. In a lab setting, scientists have been able to reverse the aging process in cells. This cell process, said West, is now firmly under human control.

Aubrey de Grey, chief science officer of the SENS Research Foundation, parsed the critical differences between gerontology and geriatrics—things that happen throughout life versus those that happen at the end of life. Understanding the differences are crucial to how we approach the diseases of aging.

Niall Ferguson

Ferguson used the metaphor of an ancient city, and the difference between squares, where people meet, and towers, where the power resides.

For tech optimists, things did not go quite as they planned. An increasingly connected world should have led to an awesome world, but it didn’t work out that way. The power was not shifted to the “squares.”

The obvious question is, why should connecting the entire world make it a better place? Connectedness has instead disrupted political hierarchies. Without tools like Twitter, campaigns like Donald Trump’s would not have won. Social media made the difference.

Connectedness has created huge, monopolistic networks, Ferguson said, “and it will take a network to defeat a network.”

In the network battlefield, the winner takes all. The financial crisis was a global network crisis. In a hyper-connected world, is the status quo sustainable?

David McWilliams

Upheaval and change is not new; it happens all the time. McWilliams, economist and best-selling author, related this to the words of William Butler Yeats, who wrote that the center falls apart while the best people are silent, and the worst of society takes over.

None of the people paid to predict the future were right, said McWilliams. At the tipping points, when things are fragile, it is the unconventional thinker that sees the world clearly and holistically. We need unconventional thinkers today—but do we reward or punish them?

McWilliams drew a connection to the types of brains rewarded in academia. It is the linear thinkers that are encouraged, he stated. The result is that millions of people leave school feeling clever. They go into banking, the military, or become economists... and we employ them. Then we end up with group-think at the top of organizations.

The most conventional thinkers being economists is very dangerous at a time like today, he said.

Panel with Niall Ferguson, David McWilliams, and Our Own John Mauldin

When asked about volatility, Ferguson said he thinks the Fed is coming off of its role in volatility suppression.

McWilliams talked about the old link between monetary policy and inflation being broken. He sees the interplay of human behavior and economics as being out of sync.

Ferguson noted that people invested in financial models but had unexpected results. One example is QE, when the anticipated inflation did not happen.

The conversation moved to the populist backlash seen in the US and Europe, and Ferguson warned that it is not temporary—it will continue, but in unknown directions. Will it produce even more radical outcomes? Will it end like the final days of the Roman Empire?

It is extraordinarily hard to predict political outcomes. It introduces uncertainty into the process of solving problems—and looking to the historical models for help will not work.

The question of decentralization as it applies to blockchain tech was raised. This question leads us to another: Will we look back on this period and think how wrong we got the blockchain story?

Day 2

Events began this morning with an investor’s dream duo of Steve Blumenthal and JPMorgan’s Gabriela Santos.

Steve kicked-off proceedings with a discussion around valuations and why they paint a negative picture for returns going forward.

Throughout history, when valuations have been as high as they are today, returns have been in the low single digits or negative over the next decade. Thus, Blumenthal said investors should now be focusing on risk management and went through specific ways to do just that.

JPMorgan Asset Management’s Gabriela Santos picked up where Steve left off, talking about asset allocation. She said investors should be focused on emerging market equities, specifically Latin America.

Jared Dillian and I

Up next was my one-on-one discussion with Jared Dillian. Jared walked out to the Bee Gees “Staying Alive.” Why?

During the recent stock market correction, Jared quipped to me that investors need to be focused on “staying alive” because we are now entering a regime change in the markets.

To highlight just how important avoiding losses are, Jared read the audience a letter he received in response to a Bloomberg article he penned. In the letter, the individual investor said they had lost over $400,000 in just a few hours during the recent correction.

Always the contrarian, Jared left attendees with, “You want to do the trade that gets you laughed off CNBC.”

Neil Howe and John Mauldin

Then our own John Mauldin sat down with top demographer Neil Howe and discussed the generational strife in the US.

Baby Boomers have reaped the rewards from the secular bull market in financial assets and now own half of all the wealth in America. However, other cohorts haven’t done so well, and Neil said that means increasing inter-generational tensions going forward.

Neil left the crowd by saying the number one thing he is watching today is inflation.

George Friedman

Geopolitical futures chairman George Friedman took the stage for the final session on the morning of day 2—and he painted a negative picture for global relations.

George said the number one trend he’s focusing on today is the global export crisis, which has wide-ranging investment implications.

While large exporters such as Germany and China do well when the global economy is strong, George said demand and consumption are now stagnating—which is terrible for them. For example, exports account for over 50% of Germany’s GDP.

George went on to say that globalization has created a social crisis in developed countries, and that means we are likely to see continued political upheaval.

The analysis into the trends shaping financial markets, the economy, and international relations by the speakers have been outstanding so far.

Jeffrey Gundlach

DoubleLine Capital CEO, Jeffrey Gundlach who said that financial markets and the economy are facing a “moment of truth.”

Gundlach delved into several reasons why he believes the secular bond bull market is likely over. He points to the explosion in the US government budget deficit, the Fed’s balance sheet roll-off, and rising inflation as the reasons why.

Gundlach believes that rising bond yields, coupled with sky-high valuations, are a toxic mix for US equities.

But the “Bond King” wasn’t bearish on all equities, saying that certain sectors in emerging markets look attractive.

Grant Williams

Next up was crowd favorite Grant Williams, founder of Real Vision TV and author of Things That Make You Go Hmmm…, who dissected monetary policy and its long-term implications.

While quantitative easing (QE) has suppressed volatility and was very good for financial assets like stock and bonds, that trend is about to reverse.

With the Fed expected to hike interest rates four times this year, plus reduction of their $4.4 trillion balance sheet, rates are rising—fast! In less than 12 months, short-year Treasury yields have more than doubled.

Williams then discussed how investors should be allocating capital in this environment and offered some specific trade ideas for the audience.

Cryptocurrency Panel

The cryptocurrency panel followed with founder and CIO of Passport Capital, John Burbank, best-selling author and co-founder of the Discovery Institute, George Gilder, CEO and CIO of US Global Investors, Frank Holmes, and co-founder and CEO of Genesis Mining, Marco Streng, moderated by our own Jared Dillian.

The panel delved into several aspects of cryptocurrencies and blockchain technology—including the “business” side of mining Bitcoin, and how institutional investors are thinking about trading it.

Holmes, who recently made a multi-million-dollar investment in the world’s first publicly listed blockchain infrastructure company, went on to discuss how the transition to “immediate” and “digital” assets by Millennial and younger generations is changing the paradigm for markets.

George Gilder and John Mauldin

John Mauldin started with one of his favorite George Gilder observations, “The source of all wealth is information.” Gilder added that capitalism is not a scheme of rewards, it’s an information system. That takes us to the axiom: Wealth is knowledge.

Gilder gave us the sweeping example that the difference between our age and the stone age is entirely the gathering of information.

Mauldin asked about equilibrium. Gilder equates it to information theory. Expect surprises from outside the database—that is the genesis of the surprise. Information is disorder—the surprise—it is not equilibrium.

Mauldin added that economists assume equilibrium as part of their models. When in reality, the markets exist in a state of chaos.

George Gilder is an immensely deep thinker, and capsulating his thoughts on these pages is immensely difficult.  You really have to be part of the discussion to get its full impact.

ETF Panel: Steven Bregman, Stephen Cucchiaro, Jan van Eck, Jared Dillian moderator.

Asked if explosive asset growth can continue, van Eck, president and CEO of Van Eck Associates, thinks it can, given the pressure to keep costs low. ETFs have invaded the financial system and are here to stay. Cucchiaro, president and CIO of 3EDGE Asset Management, added that ETFs and passive strategies grew together, but won’t necessarily remain so.

The ETF panel discussed risks embedded in leveraged ETFs and volatility ETFs/ETNs. All agreed they are complex and widely misunderstood. Van Eck pointed out that it’s dangerous to expect regulators to stop such products. Brokers have a suitability requirement and it is their role to prevent investors from taking excessive risk.

Of course, if you can’t tune in live but still want to access the video recording of the panel (and all the others from the conference), the Virtual Pass has you covered.

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