De-risking and the lessons of a beekeeper
If you believe that the long term matters, a judicious temperament will suffice
I was an invited participant earlier this year at the Strategic Investment Conference in Carlsbad, Calif. This gathering of scholars, historians and economists, and some of the finest investment minds, confirmed a number of concerns that I have been chewing on ever since quantitative easing became the tool to avoid an economic depression.
My primary concern is that the apparent gulf between underlying economic activity and the surging stock market cannot be viewed as healthy in the long run. Secondly, the continued propping of the economies and markets by central bankers in the United States, Japan and Europe is not sustainable, though the money printing can continue longer than recent “tapering” messages may suggest.
In such an environment, it would be easy to become a cash-hoarding skeptic or overtly cautious and potentially miss any opportunities the markets might provide. But if you believe that the long term matters, a judicious temperament will suffice.
One of the keynote speakers at the gathering was frequent CNBC and Bloomberg TV guest Mohammed El-Erian of Pimco, who reflected that when the participants look back on this conference they will likely say “how confusing” this time period was and how anxious and exciting it was at the same time.
Just how anxious? The stock, bond and mortgage markets took a significant tumble when Fed chief Ben Bernanke spoke of taking the Fed’s foot off the gas pedal of quantitative easing. An anxious Mr. Market interpreted the message as a signal the brake lights would be burning bright red. Anxious times often produce curious listening habits.
Shortly after the Carlsbad meetings, I enjoyed a breakfast meeting with one of my investment heroes, Jeremy Grantham of Grantham, Mayo, van Otterloo. He speaks eloquently but bluntly and brings a strong historical perspective about the challenges facing the markets, society, and some of the possible miscalculations made by central bankers around the world.
Though sometimes called a “perma-bear,” Mr. Grantham doesn’t believe the world is coming to an end and trusts the world economy could be made stronger in the long run due to declining global birth rates and China’s plans to bet heavily on renewable energy.
China’s focus in particular could lead to a new industrial revolution of yet unimagined innovations, efficiencies and economic transformation if the world’s second-largest economy “gets things right.”
Times have changed
We are neither bullish nor bearish in our investment perspectives, but we have continued our regular review and tactical rebalancing of our client portfolios to weather the eventual end of the central banks’ grand experiment. There is little doubt it will end eventually. We are living through a test of whether central bank economic policies – to prop up their economies with monetary policy – will prove to be a necessary stopgap measure or merely a “Potemkin village” illusion of stability.
As I reflect on this mission, I am struck by how much has dramatically changed in these conversations with our clients compared to one, two, or even three decades ago. It’s more than a light modification here or a shift in assets there.
For example, today we talk much more about geopolitics and issues of policy and behavior. The debt strategies in the European Union or the latest crisis in a small country like Cyprus were among the international issues that wove their way into our meetings in Carlsbad. Today, we worry about the return of your money as much as the return on it. We need to be paid when giving up our valuable liquidity.
Compare the recent paradigm to when I began my career almost 30 years ago. Our focus was on corporate earnings, the multiple to stock prices, the interest rate environment and macro issues, such as inflation and productivity. Failing institutions or dysfunctional governments were not hot topics then. In 2013, dividends, earnings and corporate cash levels continue rising as companies adapt to a slow or no-growth business model that would be considered unthinkable in 1983.
Our practice serves over $300 million of individual nest eggs thanks to systems and tools that reduce the burdens of client transactions. Our discussions today are much more focused on our strategic role as fiduciaries and risk management rather than one is focused on transactions.
At the Carlsbad conference, another noted economist, Gary Schilling, talked about his passion of being a beekeeper and how not to get “stung” by the markets. After one of his presentations, I reflected on the counsel he provided (and I thankfully followed) almost 30 years ago: “Buy 30-year zero coupon U.S. Treasury bonds,” he said at the time, when interest rates were nearly 14 percent. Feel free to email me for the rest of the story at email@example.com.
Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000.