The investment landscape and headlines of today would be unrecognizable to someone who fell asleep six months ago and suddenly snapped awake. Financial markets have undergone a tectonic shift that few saw coming. Back in the summer of 2016, the prevailing belief was that central banks were all-powerful and would forever push rates lower in a continuation of policies followed since the crash of 2008. In a show of force, the Bank of England announced a fresh cut to their interest rate to fend off an economic seizure in the face of the Brexit decision, the European Central Bank re-upped quantitative easing, and the Fed was maintaining overnight rates at just above zero. Read More

Evergreen initiated a slightly modified version of its annual forecast EVA just over a year ago. We shifted from specific predictions to attempting to identify developments that could catch the investment community off-guard. As we noted at the time, this was an unabashed imitation of what Blackstone’s Byron Wien has done for years (including when he was Chief US Investment Strategist for Morgan Stanley). However, we also did this because it is the most unanticipated events that have the greatest market impact. Read More

A Tale of Two Halves: If we simply evaluate global market returns last year, one might conclude 2016 was a fairly uneventful. Global stocks and bonds finished up 8%, and 4% respectively, which is generally what you'd expect in a typical year. However, if we dive a bit deeper "uneventful" wouldn't be an appropriate description. Read More

Bye-bye buy-backs? First of all, Happy 2017 to all our EVA readers! Hopefully, the coming year will provide an opportunity for those few remaining contrarians out there—amongst a swelling throng of passive investors—to generate respectable profits and nail down some attractive yields. It’s also my hope that what I’m going to convey next won’t severely undercut the happy New Year sentiments I’ve just expressed. Read More

Legend has it that Richard Nixon once said: “We’re all Keynesians now.” In reality—and most ironically—those words were actually uttered years earlier by the ultimate anti-Keynesian economist, Milton Friedman. However, former President Nixon did riff off of this when he declared, after removing the US from the gold standard in 1971, “I’m now a Keynesian in economics.” Unsurprisingly, this turned out to be bad news for the American public as Mr. Nixon’s conversion unleashed a decade of stagnation and inflation. As a result, this wrenching experience produced a new term that the disciples of Keynes had previously believed was impossible: stagflation. Read More

Click here to view as PDF. “The world currently has an excess of every manufactured good.” -JOHANN RUPERT, CEO of luxury consumer products company, Richemont. “Clearly, our consumers’ budgets are pinched.” -Dollar General CEO, TODD VASOS First of all, Evergreen would like to wish all of its clients, friends, and EVA readers a Merry Christmas and an abundantly happy Holiday Season. Considering how 2016 started out, with stocks plunging and credit spreads soaring, we should all feel exceedingly grateful that it’s turned out to be a nicely profitable year for US-focused investors. Evergreen definitely has an “attitude of gratitude” for the tremendous reversal of fortune the energy sector has enjoyed from the depths of early February. As most EVA readers are aware, we were adamant that energy stocks and bonds offered massive upside after the pasting they experienced from the summer of 2014 into the start of this year. Frankly, we have been pleasantly surprised by both the speed and power of their resurgence. We believe there is more upside ahead in 2017, particularly with the high-income mid-stream energy infrastructure (MLPs) securities. Despite their monster recovery, master limited partnerships remain down 42% from their 2014 highs. There’s a lot to cover in this Random Thoughts edition so let’s get to it! Read More

Click here to view as PDF. “The more certain something is, the less likely it is to be profitable.” -JIM ROGERS, acclaimed investor and former partner of George Soros “You can’t buy what is popular and do well.” -WARREN BUFFETT   Small-caps, large prices. It dawned on me in creating that section title how often those of us in the financial industry toss around the terms “large-cap, mid-cap, and small-cap”. Normal human beings probably get the general idea but not the essence. To explain, please allow me to bring up another oft-used moniker: blue chips. That’s likely a more familiar term to most investors but what you may not be aware of is that it comes from poker where the highest value chips are blue—or at least they used to be in bygone days. Grizzled market veterans also sometimes refer to smaller companies as red chips, the next level down in the poker pecking order. In days of less generous overall market valuations, the small-cap cut off point was a billion market capitalization (from which the abbreviation “cap” is derived). Capitalization is calculated by multiplying the price per share by the total number of shares outstanding. Thus, if a company has 100 million shares in existence and the current price per share is $10, then the total market “cap” is $1 billion. Today, that break-point is generally assumed to be around $2 billion. (FYI, underneath small-caps are micro-caps—those companies with less than $300 million of market value—and at rock-bottom are the nano-caps, with market caps below $50 million; if you’ve never heard of the latter, don’t feel bad—until last week, neither had I!) Read More

Click here to view as PDF. “Anyone who isn’t confused, clearly doesn’t understand the situation.” -EDWARD R. MURROW, journalist and war correspondent. INTRODUCTION In the cross-hairs of cross-currents. One of our main objectives in publishing the Evergreen Virtual Advisor (EVA) is to offer readers both our views and those that contradict them. Part of our rationale for doing so is that we realize how easy it is to be wrong when making predictions, especially about the future, as Yogi Berra would often say. This fallibility confession is despite the fact that our long-term forecasting record is pretty respectable including warning of past bubbles in tech, housing, Chinese stocks, commodities, among other manias we’ve called out over the years, well before they crashed. We also issued bullish commentary post-9/11 and, particularly, in the midst of the global financial crisis. On the embarrassing side, we have been expecting the US stock market to have a deeper and more lasting shakeout than it has experienced since 2013, even though the broad market index (NYSE Composite) has gone nowhere for almost three years. That admission is actually a good segue into this month’s edition of the Gavekal EVA which was written by the co-founder of our partner firm, Anatole Kaletsky. Anatole has been resolutely bullish on US stocks throughout the Obama years, meaning he’s been spot on. Lately, though, he was been expressing some reservations due to rising political risks. One of those, in the months leading up to November 8th, was supposed to be the potential election of Donald Trump. Yet, as we all now know, that wasn’t a risk at all—unless you are talking about the upside variety. Last week’s Guest EVA featured commentaries by Bill Gross, Lacy Hunt, and Van Hoisington, three of the world’s shrewdest bond investors. They were united in their views that Trumponomics would not produce a major bear market in bonds. Yet, as you will soon read, Anatole takes the opposite view. Interestingly, he concedes that the man who is considered by many to be the new “King of Bonds”, Jeff Gundlach, is back in the camp of calling for rates to recede, at least temporarily. This is after he predicted both the recent bond sell-off and Trump’s election, two very prescient prognostications. Longer-term, though, Mr. Gundlach and Anatole are each looking for much higher interest rates, somewhere in the 5% to 6% range on treasury notes. It’s important to clarify that they believe this will play out over time, not overnight. Jeff Gundlach thinks this potential rate surge might take five years to unfold while Anatole is postulating it might be sooner, like 2018 or 2019. Even the latter scenario is extended but, regardless of the timing, a rate increase of this magnitude would pose some serious challenges for a number of reasons, as expressed in recent EVAs. Read More

Click here to view as PDF. “Would higher inflation lead to stronger equity market returns? Here the answer is a simple no. History has shown time and again that accelerating inflation leads to lower P/Es, and vice versa.” -LOUIS GAVE, founder Gavekal Research. INTRODUCTION KJR. For younger Seattleites, the sequential letters K-J-R are synonymous with sports radio, 950 on your dial. But for all those EVA readers who came of age in the Seattle area during the ‘60s and ‘70s, KJR meant one thing: the best rock and roll radio station in the city. For the purposes of this EVA, KJR stands for something entirely different—as in, Knee-Jerk Reaction—and it is for sure a force that has been rocking and rolling the financial markets in recent weeks. In the behavioral sense of the phrase (versus the patellar reflex to your doctor’s tap), this KJR can be defined as an emotional rather than analytical response to an event or experience. Since Donald Trump was elected three weeks ago, there has been a whole lot of knee-jerk reacting going on in nearly every corner of the investment world. Safety and income are out, while stocks exposed to a presumed inflationary boom are in—with little thought given to realities such as the disinflationary drag from a rocketing dollar. This month’s Guest EVA edition is meant to offer the opposite of the KJR response to one of the most surprising presidential election outcomes since Truman beat Dewey. Read More

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