Click here to view as PDF. “We don’t see things as they are, we see them as we are.” -ANAIS NIN, essayist “Education is a civil defense against media fallout.” -MARSHALL MCLUHAN, philosopher INTRODUCTION Our partners at Gavekal have long written about the four key quadrants of investing:… Read More

Click here to view as PDF. “If Trump wins, I’m leaving the country. If Hillary wins, I’m leaving the country. This is not a political post; I just want to travel.” -ANONYMOUS INTRODUCTION Stop the presses! Writing a weekly newsletter is an interesting exercise in time-management, especially when… Read More

Click here to view as PDF. “There’s a huge layer of the economy unseen in the official data and…unaccounted for on the income statements and balance sheets of most companies. Free digital goods, the sharing economy, and changes in our relationship have already had big effects on our well-being.” -ERIK BRYNJOLFSSON and ANDREW MCAFEE, authors of The Second Machine Age Introduction The PM Who Knew Too Much. In the investment business, PM doesn’t stand for the time of day between noon and midnight. Nor does it mean prime minister. Rather, it’s short for portfolio manager. It’s been a thankless job in recent years for the most part, even among many of the money management industry’s most illustrious practitioners. Prior EVAs have shared how tough 2015 was for a long list of super-stars and, according to the estimable James Grant (author of Grant’s Interest Rate Observer), 2016 is another stinker (knock on a lumberyard of wood that this continues to be a strong year for Evergreen portfolios). Index, or passive, vehicles have been largely the place to be and they have attracted vast in-flows—often at the expense of their “active” counterparts. The recent failure of thinking PMs to cope with an investment world that seems totally misaligned relative to punk economic growth, rapidly mounting debt levels, and soaring social malaise, is causing active managers to feel, in the words of this month’s Guest EVA author, downright “surly”. Jordi Visser, who wrote the highlighted treatise for this EVA—“The Art of Unlearning”—is no up-in-the-ivory-tower academic egghead. Rather, he is a PM himself, as Chief Investment Officer of Weiss Advisers, LLC, one of the oldest and most consistently successful hedge funds extant. Jordi penned his intriguing piece back in June and I must plead poor judgment in having read it just recently. As you will soon see, it’s a much more up-beat take on present circumstances than my outlook--which is precisely why I wanted you to see it. You will also notice that it’s longer than what I typically write and my intent was to edit it down. But I didn’t think I could do so without harming its flow and message. Therefore, let me attempt to hit his high points for those that don’t have time to read it in full. Read More

Click here to view as PDF. “Impressive scholarly research has demonstrated that the government spending multiplier is in fact negative, meaning that a dollar of deficit spending slows economic output.”  -Economist and bond manager extraordinaire, LACY HUNT “And you experts in the law, woe to you, because you load people down with burdens they can hardly carry, and you yourselves will not lift one finger to help them.”  -JESUS OF NAZARETH Introduction Big government, even bigger sins. This month’s Gavekal version of the Evergreen Virtual Advisor is occurring slightly out-of-sequence. The reason is due to my belief that the “Ideas” piece from Charles Gave highlighted in this issue serves as a nifty follow-on to last week’s EVA, “The 5 Cs: Could Congress Create Consecutive Crises” (click here to view). The lead title pretty well sums up the thesis I was posing: a) Congress was a key actor in the housing horror story and b) that it is busy messing things up again with its “war on the private sector” behavior. To be clear, I was not alleging that the two specific companies mentioned last week were guilt-free. As I noted, Wells Fargo clearly bungled the fraudulent account scandal and ITT Educational was, as I also observed, a dodgy operator. The key point I was conveying was the double standard on the part of Congress. What it perpetrated in the build-up to the housing crash was far more injurious to our country than what Wells did wrong. Yet it sat in sanctimonious judgment of the bank and its CEO like an avenging angel.  It’s similar to a crooked traffic cop throwing a speeding driver in jail when the cop had previously committed vehicular homicide and gotten off without even a warning. (In the case of ITT Educational, the double standard involves a competitor of theirs who has avoided prosecution despite worse performance metrics and has extravagantly compensated an ex-US president.) Think about it for a moment. Back in 2000, we had a booming economy and our government was running budget surpluses (under a democratic president, by the way). Alan Greenspan, the Fed chairman at the time, publicly worried about all US treasury debt being paid off by 2010 (another in a long line of massive prediction misses by “the maestro”). Today, GDP growth is barely above recession levels and government debt rose by $1.4 trillion in the most recent Federal fiscal year—despite the fact the official deficit was less than half that amount.  Instead of paying off all our debt, it has surged by over $10 trillion in a mere ten years, basically tripling the outstanding balance at the beginning of the millennium.  Sixteen years isn’t a long stretch of time, but the degradation of our economic condition over that period is stunning—notwithstanding the S&P 500 behaving like all is hunky-dory. Read More

Click here to view as PDF. “Most investors are not well-equipped for an analysis of that kind (political risk). They built their careers crunching numbers, not pondering social science.” -The Financial Times’ GILLIAN TETT “The roughly $275 billion in legal costs for global banks since 2008 translates into more than $5 trillion of reduced lending capacity to the real economy.” -MINOUCHE SHAFIK, deputy governor of the Bank of England SUMMARY -Could Congress create consecutive crises? Before answering this question, was it complicit in the housing fiasco and the resulting global financial crisis? -Between the Community Reinvestment Act (forcing banks to issue high-risk mortgages), the Glass-Steagall repeal (allowing them to enter riskier non-banking related areas), failure to reform Fannie Mae and Freddie Mac (both took on enormous credit risk on a small capital base), and congressmen and women like Barney Frank (who publicly stated he wanted to “roll the dice on housing”), the answer in this author’s mind is a resounding yes. -This time, Congress has used the Fed’s Big Easy monetary policies as an excuse not to enact crucial reforms. But, while it has had reform paralysis, it has been hyperactive in creating new regulations (560 additional major new regulations in the past 8 years). -Small businesses are particularly vulnerable to this regulatory onslaught. -Perhaps even worse, Congress is now proactively attacking the private sector. A key example has been the strident attacks on one of America’s best banks: Wells Fargo. -Wells clearly made mistakes, but the total cost to consumers was around $2 1/2 million. Calling it a “criminal enterprise” and “a school for scoundrels”, as some in Congress did, seems way over the top, especially for a mega-bank that was one of the few not needing a bail-out during the financial crisis. -It’s almost certain that there will be more companies and senior management teams called on the congressional carpet, with huge fines and more regulations heaped on the private sector. This is becoming a major drag on growth. -Some in Congress obviously hold capitalism—and, especially, capitalists—in very low esteem. Unfortunately, this attitude seems to be spreading, despite the collapse of numerous socialistic systems around the world. -The stock market is ignoring this escalating governmental hostility, as it is with so many other risks. Read More

Click here to view as PDF. “To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about.” -Economist FREDERICH HAYEK, as relayed by William White in his Adam Smith prize acceptance speech last month. INTRODUCTION No BS from the BIS. Few non-professional investors have heard of the Bank from International Settlements (BIS), yet it is routinely referred to as the “central banker for central banks”. Even fewer have heard the name William R. White although Mr. White was essentially the chief economist for the BIS from 1995 to 2008, as well as a member of its executive committee. The low-profile of the BIS and Bill White is unfortunate since they were among the few prominent members of the financial oversight system that presciently warned of the impending disaster a decade ago. The Canadian-born Mr. White now serves as the chairman of the Economic and Development Review Committee for the supra-national Organization for Economic Co-operation and Development (OECD). Last month, he was awarded the prestigious Adam Smith prize (named after the 18th century Brit considered the father of economics), the highest award bestowed by the US National Association of Business Economists. This month’s Guest EVA is a transcript of a portion of his speech given upon receiving the Adam Smith prize. In it, he provides a brief overview of the conditions that produced the last crisis. But more significantly, he explains why he believes another—possibly more severe—convulsion is possible. When people tell me that they are confused by all the conflicting opinions out there—some extremely bullish and others equally pessimistic—my usual response is to suggest they listen to those who got the last blow-up right. As I’ve written before, it amazes me that almost exactly the same individuals who were saying “no worries” back in 2006 are repeating that message today. And those who were raising neon-red flags ten years ago, are, in almost all cases, running them up the flag pole again. For example, in 2007, Wharton professor and perpetual stock market cheerleader Jeremy Siegel debated Jeremy Grantham, co-founder of $118 billion money manager GMO. In the battle of the two Jeremys from nine years ago, Mr. Siegel argued why stocks were still bargain-priced while Mr. Grantham warned of a major shakeout pending due to the housing bubble, among other concerns. Today, they are back at it, with Mr. Siegel forecasting an on-going bull market contrasted against Mr. Grantham’s, and his firm’s, prediction of many years of flat to slightly down after-inflation returns. Perhaps it’s no surprise, based on past history, but Mr. White comes down very much in the GMO camp, per the last line of our excerpt (you won’t hurt my feelings if you skip right to that part; on the other hand, to read his entire speech, please click on this link. Less technical readers may also want to skip most of the footnotes). Read More

Click here to view as PDF. “Each generation will reap what the former generation has sown.” -CHINESE PROVERB “If everybody is thinking alike, then somebody isn’t thinking.” -GENERAL GEORGE PATTON INTRODUCTION This month’s Gavekal-authored version of the Evergreen Virtual Advisor addresses what seems to be on everyone’s mind these days—you guessed it:  The US presidential election. In fact, in my nearly 38 years in the investment business, I don’t think I’ve ever experienced such a singular focus on the part of investors (with the post-9/11/01 chaos a possible exception). As you will read, this piece was written right before last week’s presidential debate, which most observers feel was a Hillary win. It includes a spirited opinion exchange with Gavekal’s three founders—Louis Gave, Charles Gave, and Anatole Kaletsky—joined by a fourth senior partner, Arthur Kroeber. As is the case with Evergreen, there is plenty of disagreement among the principals, particularly with regard to whether the US dollar and financial markets are likely to shrug off a Trump victory. What jumped out at me as I read and re-read this piece, was Louis’ opening comment about complacency. In the September 23rd EVA, we ran a chart showing the unusually low volatility readings registered lately. This definitely reflects the relaxed attitude presently among the majority of investors (high volatility occurs during times of intense market fears while low volatility always occurs during periods when downside risks are ignored). Such insouciance strikes us as totally inappropriate relative to the increasingly hazardous global political, financial, and economic climate. Actually, we may be in the early stages of a complacency reversal. In the opening days of October, we’ve seen some extreme weakness in the formerly red-hot equity income areas such as US REITs and utilities, the so-called bond proxies. (Fortunately, and knock on several cords of wood, energy infrastructure securities, such as MLPs, have mostly escaped the carnage.) The reasons for this shift are the Fed’s on-going chatter about raising rates in December combined with smoke signals from across the Atlantic that the European Central Bank (ECB) is having second thoughts about its money manufacturing/market manipulation scheme. Read More

Click here to view as PDF. “But we are restricted from investing in that wider range of assets…it could be useful (at a later date) to be able to intervene directly in assets where the prices have a more direct link to spending.” -JANET YELLEN, responding earlier this week as to whether the Fed had the authority to purchase stocks and corporate bonds. INTRODUCTION Unless you are a first time EVA reader, you are surely aware that Evergreen Gavekal is skeptical that the current US stock market has much left in the tank. This week, we decided to use a roundtable-type format featuring our senior investment team contributors.  In this issue, we examine 10 different investment scenarios that could meaningfully impact the future direction of the stock market. The tone is less what could go wrong and more an attempt to address some of the popular ideas we’ve heard that might produce a credible extension to the current bull market. You will notice that the opinions below are far from unanimous and, as such, they give readers a glimpse into the different ways our team’s philosophy is formed. Start to finish, this week’s edition is about a 15-minute read, but for our readers who prefer a more abbreviated version this format easily allows readers to skip around to topics (or authors) on which (or whom) they wish to focus. Read More

Click here to view as PDF. “Central banks are the largest blind buyers in the world, accumulating trillions of dollars worth of assets with no thought of price, valuation, or exit strategy.” -Jones Trading’s MIKE O'ROURKE INTRODUCTION This week’s EVA brings the second edition of our new Random Thoughts format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion. In this issue, we are looking at, once again, the powerful financial force known as credit spreads.   Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we look at the connection between one of the most famous yoga poses and US economic trends (now, if that doesn’t pique your interest, you need some strong coffee!).  Lastly, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint:  both make a dart-board look good!). As always, your feedback is welcomed and appreciated. Read More

Click to view as PDF. “Monetary policy is not a panacea…Most of the policies that support robust economic growth in the long run are outside the province of the central bank.” -Former Fed chairman, BEN BERNANKE (in the days before he went all-in on Quantitative Easing—QE) INTRODUCTION This month’s Guest EVA is, in my opinion, a very special edition of our newsletter. First, the downside: It is much longer than what we normally “re-broadcast”. On the upside, however, I believe that this document from my close friend, Vincent Deluard, is one of best and most comprehensive overviews of the complex financial maze investors everywhere are attempting to navigate. For those of you who simply don’t have the time to read the full letter, I’d suggest you scan the opening pages and then, if you’re interested, check out the conclusion. As someone who plows through about 1000 pages of research every week, another trick I’ve learned on speed-scanning longer pieces is to review the charts. If those interest me, I then read the accompanying text. However, I do believe for those who are baffled by the bizarre economic and market environment we find ourselves in these days, it’s worth taking the time to read Vince’s full opus, even if you break it down into a few sessions. In several EVAs over the past few months, I’ve quoted Vincent and some of his work while he was at Ned Davis Research (NDR), one of our key sources of top-notch market analysis. However, Vincent—one of the smartest people I’ve ever met—recently departed from NDR and is now providing his astute insights from the San Francisco office of INTL FC Stone. The good news is that Vincent and I are still in constant contact. One of the best aspects of this letter is that Vincent examines both the bull and bear case, starting with the latter. And, although his conclusion comes down on the bullish side, he makes a compelling argument for those of us who are anticipating a sell-off. In fact, I suspect many of you are going to feel that his bearish scenario is more plausible than the bull story. Yet, I think it’s important to realize his bullish take could be right and we should seriously consider his rationale. It’s also critical to note that he believes there is a two-thirds chance of a correction this fall should complacency become too pervasive. It’s the Evergreen view that recent ultra-complacent readings on things like the Volatility Index (VIX) were proof positive that such a condition indeed occurred. Interestingly, the market weakness we’ve seen this month came right after those low anxiety levels were touched. As much as I respect Vincent, there are several points I disagree with, the most important being the notion that governments have stumbled on a magical way to extinguish their sovereign debt via central bank purchases. He points out that the Fed and its counterparts in leading countries have fabricated $9 trillion (actually, $15 trillion if all QE-participants are included) to buy government bonds. He further observes this hasn’t created the high inflation that was feared when this process began back in 2008. His conclusion is that, therefore, QEs can continue to painlessly extinguish debt. Vincent has a lot of influential company advocating this as a miracle solution but I believe there is a fatal flaw in this logic. Read More