Click here to view as PDF. “Future economic historians will look back at the first quarter of 2016 as the turning point; that was the end of the hangover induced by the global financial crisis.” -NIALL FERGUSON INTRODUCTION Is it possible? Could it be true? Might Brexit actually be bullish for financial markets? Few would have dreamed this possible a week ago but one of those rare individuals was—and still is—Vincent Deluard, among the keenest minds at Ned Davis Research. Vincent’s thesis is that the chaos created by Brexit gives the world’s central bankers a green light to yet further saturate the world with their make-believe money, once again bailing out financial markets. He actually goes so far as to muse about the possibility of a “melt-up” in stocks, caused by another torrential downpour of manna from central bank heaven. Ironically, his suggestions in a series of emails to me this week are consistent with the first half of the EVA we were planning to send out last Friday. But, as noted at the time, the British vote caused the Evergreen Gavekal team to rapidly shift gears and focus on that shocking event. Now it’s time to run our delayed Guest EVA which contains an attitude shift that is almost as surprising as Brexit. EVA readers are likely to have vivid memories of this month’s Guest edition author, Worth Wray. Worth wrote a number of EVAs in the second half of 2015 and earlier this year before returning to his Texas roots a few months ago, becoming the Chief Economist for STA Wealth Management in Houston. Worth and I have maintained contact since his friendly departure and he was kind enough to add me to the distribution list for his weekly newsletter titled, appropriately enough, For What It’s Worth. He also attended the recent Mauldin Strategic Investment Conference (SIC) in Dallas, as did several Evergreen team members. (If you missed our overviews of the SIC, published a few weeks ago, you can read them here: part one and part two). Worth was particularly intrigued by the comments of acclaimed economist and historian Niall Ferguson, one of the keynote speakers at the SIC (but who I missed, unfortunately). Veteran EVA readers may recall my focus on Professor Ferguson’s presentation at the SIC a few years ago in which he discussed the thesis of his then new book, “The Great Degeneration”. As the title implies, it was a scathing critique of current developed-world policies, particularly what he pithily referred to as “The Rule of Lawyers”. This was meant to be a play on the sacrosanct notion that the “Rule of Law” is essential for healthy economic development. Professor Ferguson’s thesis, until recently, was that it was being perverted by many in the legal profession (aided and abetted by the political class, who also frequently are, or were, attorneys). Accordingly, as Worth points out, when someone like Prof. Ferguson does a complete about-face—shifting, as he has done, from the catcalling-to the cheering-section of the bleachers—it’s a highly noteworthy development. Because one of the goals of EVA is to examine both the bull and bear case, we were particularly inclined to share this “epiphany” with our readers. Without giving away too much about his position shift, suffice to say that, like Vincent, he believes central banks have won the battle against the forces of stagnation and government paralysis (though the latter believes they may very well lose the war). As mentioned above, Worth is presenting both sides of The Great Debate on whether current policies are working or failing, by also including a counterpoint section focused on hedge fund icon John Burbank. As you will read, Mr. Burbank has a much darker view of current conditions (including a 66% chance of a US recession soon). While Evergreen continues to lean toward the latter viewpoint, we will once again emphasize that since no one has ever seen this set of financial and economic circumstances before—made even more unparalleled by Brexit—keeping an open mind is essential. As the old saw goes, a mind is like a parachute—it only works when it is open. David Hay Read More

Click here to view as PDF. “People willing to trade their freedom for temporary security deserve neither and will lose both.” -BENJAMIN FRANKLIN Introduction Hello darkness my old friend, I’ve come to talk with you again… The famous first line of the 1964 hit by Simon and Garfunkel The Sound of Silence feels relevant this morning. Whether Thursday’s historic moment in European history will be remembered as a day of darkness will only be revealed with the convenient benefit of hindsight. Nevertheless, it’s put the world on the edge of its seat. Investors around the globe are coming to grips with an event that will hit many like a knockout punch no one saw coming based on pre-vote polls showing “remain” a safe bet. Internationally, many risk assets have been getting crushed following the news, with even the ever-resilient US stock market falling over 3.6%. Yet, despite steep declines in certain markets, an actual selling panic hasn’t transpired. In the four sections to follow, we, along with our partners at Gavekal, explore the implications of Britain’s momentous decision and whether this is just another hurdle to be overcome on the way to higher stock prices and, possibly, even lower interest rates. Read More

Click here to view the PDF “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain INTRODUCTION Last week’s EVA gave readers a healthy dose of Charles Gave. In this edition, we are highlighting some recent insights from his son, and Gavekal’s founder, Louis Gave. Louis is one of the most innately upbeat individuals I know. Accordingly, when he is concerned it leads me to believe my caution isn’t just a function of advancing years (and, some might say, advancing senility). As befitting his preternaturally sunny disposition, Louis isn’t bearish; he just believes the risk/reward proposition for stock prices is much more attractive outside of the US, particularly in Asia. Yet, as you will read, even Louis concedes that should a serious economic or financial market disruption hit the US, it will be very difficult for Asian stocks to avoid collateral damage. But it’s hard to get badly hurt when you are falling out of a basement window. And Asia’s stock markets have clearly been cellar-dwellers since 2012. Four years seems like an eternity these days even though it really wasn’t that long ago when investors were gaga over emerging markets and, at the same time, resoundingly apathetic toward home-grown shares. Today, the majority view seems to be that the US will continue to be the planet’s equity market pacesetter. The consensus also appears convinced that Asian stocks will stay in the deep freeze with investors particularly negative on China and Japan, two of Asia’s most important markets. However, that same dismissive attitude prevailed toward gold mining shares right before they did their recent moon-shot. If you haven’t noticed, mood swings happen very suddenly of late. Therefore, please keep an open mind and let Louis make his case for putting some Asian cuisine on your investment menu. Read More

This week, we are highlighting some recent insights from Gavekal founder Louis Gave. Below is a brief summary of his piece “The Challenge for Equity Markets.” -Unsettling news—from a potential UK departure out of the European Union, to on-going terrorist attacks in the US, and America’s bizarre presidential race—is pressuring… Read More

Click here to view PDF. “Hubris is one of the world’s greatest renewable resources.” -Humorist P. J. O’Rourke INTRODUCTION As indicated last week, this is the second installment of a two-part Evergreen Virtual Advisor (EVA)—Exchange version—dedicated to the Mauldin Economics’ Strategic Investment Conference (SIC). It was held in Dallas at the end of last month and for the three days we were there, the sun wasn’t. The clouds were thick, the air was heavy, and, on the last night, we experienced the worst thunderstorms this Left Coast boy has ever seen. Inside, as relayed in the June 3rd EVA, the conditions were largely the same. Gloom was the dominant sentiment, despite the fact that the financial markets have been on a roll over the past three months. It’s been a long time since I felt like the token bull but my brief speech on why I felt the corporate bond market would now be supported by central banks gave me a bit of a Pollyanna sensation. My short talk also generated a mild amount of controversy. Former Dallas Fed President Dick Fisher told the crowd on the final day that there was zero chance the Fed would emulate the ECB in buying corporate debt to lower credit spreads. Though I have the utmost respect for Mr. Fisher, I would love to take that wager (what would the odds be when the probability is zero?) However, we won’t know until the next crisis strikes which one of us is right. According to the majority of speakers we heard, we won’t have to wait very long. As Mark Nicoletti expressed last week, perhaps that should be viewed as bullish indicator. Typically, such intense negativity means a bottom is close at hand. Yet, again, we are at record high prices for real estate, stocks, and high-grade bonds. Consequently, like so many things these days, it’s a most confusing state of affairs. Besides my talk, there were certainly some other occasional rays of optimism, as Jeff Dicks noted last week in his piece on Mexico. And, as I will explain below, our esteemed colleague Anatole Kalestky was also a lonely—though eloquent voice—of bullishness. On the other hand, his partner Charles Gave, was every bit as persuasive that the façade of prosperity central banks have created is beginning to crack. In addition to having my first chance to speak at the SIC, I was also given the honor of interviewing Charles, as you will soon read. But, before we get to that, Jeff Eulberg summarizes his perception of one of the most important factors in the investment world today: the future path of the US dollar. Like all of us, Jeff came away a bit bemused by all the contradictory opinions on the greenback he heard at the SIC. It’s possible, though, based on last week’s stunningly weak US jobs release, that we now have a clearer sense of the path of least resistance. (Hint: it isn’t up!) David Hay Read More

Click here to view as PDF. “Truth has no special time of its own. Its hour is now—always.” - ALBERT SCHWEITZER, physician and humanitarian “The nice part about being a pessimist is that you are constantly being proven right or pleasantly surprised.” - GEORGE WILL “Successful investing is when people agree with you…later.” - JIM GRANT INTRODUCTION For those who haven’t been to the Mauldin Economics’ Strategic Investment Conference (SIC), or are not aware of it, today’s edition of the Evergreen Virtual Advisor (EVA) will provide a glimpse into what takes place at this event. Every May, wealthy individuals, professional investors, strategists, and economists alike flock to whichever city John Mauldin and his crew decides will play host. For three days last week, attendees sat in a dark ballroom at a Dallas Hotel. Each luminary shares the lens with which they view the state and fate of the world economy and financial markets. It’s truly a “who’s who” of outstanding minds. The legendary James Grant was there. Niall Ferguson, the esteemed Harvard historian and author, also spoke. Former Dallas Fed Chair Richard Fisher gave his assessment of the world. The list goes on and this year the Mauldin team decided to give attendees a hefty dose of Gavekal/Evergreen viewpoints by inviting four of our team members to speak. Clients often tell us they take comfort in knowing we have differing opinions within our investment team. Similarly, readers (now approaching 11,000) of EVA enjoy hearing from a variety of perspectives on the same topic. In an effort to both convey much of the very valuable material that was presented, and at the same time provide differing perspectives, Mark Nicoletti, Tyler Hay, and Jeff Dicks will each recap one key takeaway they felt worthy of sharing with our readers. To prevent financial information overload, we are splitting this issue into two parts with Jeff Eulberg and David Hay summarizing their impressions next week. Read More

Click here to view as PDF. Read More

Click here to view PDF. “Tomorrow belongs to those who can hear it coming.”  -DAVID BOWIE INTRODUCTION When a choice isn’t a choice. For this month’s edition of our Guest EVA, we are again showcasing one of the financial world’s rising-star newsletter writers, Ben Hunt.  In addition to being the developer of the Epsilon Theory website, Ben has become increasingly known for coining the phrases “The Golden Age of the Central Banker” and “The Era of Central Bank Omnipotence”.  Both of these expressions relate to his belief that we are in an era where markets are almost totally reliant on the machinations of the Fed and its developed world peers (a view Evergreen shares). Recently, he has downgraded his  first characterization to the “The Silver Age of the Central Banker” due to some fraying around the edges of their alleged superpowers.  It’s important to convey right up front that Ben’s take on this isn’t bullish or bearish.  It just acknowledges the reality of the environment the Fed and its counterparts have created.  In fact, toward the end of his article, Ben brings up a new central bank tool that has significant positive implications for supporting asset prices, a development we will elaborate on shortly. You will soon see that this piece was written for investment professionals. Nevertheless, it contains valuable insights for all investors seeking to cope with an interest rate paradigm never witnessed before in human history.  Because these are truly uncharted waters, the crystal balls of even investment professionals are unusually cloudy (emphasis on “unusually”).  Thus, as Ben writes, relying on standard portfolio design tactics is unlikely to produce acceptable returns. In his view, this forces investors to face a “Hobson’s Choice” between being satisfied with earning almost nothing or adopting an unconventional position. The latter, of course, is, as always, fraught with copious amounts of reputational, career, and psychological risks.  As Ben notes, John Maynard Keynes summed this up well when he said, some eighty years ago, “It is better for your reputation to fail conventionally than to succeed unconventionally.”  As a firm that has continually railed against the serial bubbles since 2002 (and, personally, as far back as the late 1980s), we know well the challenges of resisting group-think in striving to succeed unconventionally. Ben believes that the era of central bank omnipotence won’t come to an end until someone like European Central Bank (ECB) chief Mario Draghi announces to the world:  “Well, there’s really nothing more we can do…sorry…” (Or, perhaps, “scusi”).  However, Super Mario, as he’s known, is still flexing his monetary muscles.  In March, he took the momentous step of committing the ECB to buying corporate bonds for the first time ever (naturally, using out-of-thin-air money). This is where it gets interesting—and potentially bullish—for US income investors.  Because the ECB is willing to acquire corporate debt issued in Europe by US companies that have operations on the Continent, nearly all of our multinational (i.e., blue chip) enterprises can access this program.  Several have already taken advantage of the lower yields that have resulted from the announcement, even though the ECB’s buying binge doesn’t start until next month.  For example, McDonald’s recently issued a five-year euro-denominated bond at an interest rate of just 0.45%! Read More

Click here to view PDF. “When a measure becomes a target, it ceases to be a good measure.” -GOODHART’S LAW INTRODUCTION This week’s EVA is our once-a-month sharing of commentaries from our partners at Gavekal Research. As you will see, this is a “two-fer”: the first written by Gavekal’s founder, Louis Gave, while the second was penned (or keyboarded) by his father, Charles Gave. Louis’ article, “Peak Hubris”, highlights the escalating confrontation between Big Tech and Big Government. As he points out, some of the world’s largest technology companies are in a position where they can actually influence public attitudes, viewpoints, and possibly even elections. Unsurprisingly, this makes certain governments—maybe even most—increasingly edgy. In fact, the Wall Street Journal ran a front page article on precisely this subject just two days ago. It described allegations that the “news curators” at Facebook have been suppressing conservative views and elevating those (presumably more liberal) that weren’t popular “trending topics”. (Is it just me or does the term “news curator” give you a creepy Orwellian feeling, as well?) Similarly, Apple’s refusal to unlock its iPhone for US law enforcement officials has possibly raised eyebrows in Beijing, causing Chinese authorities to “encourage” the sale of domestic smart-phone producers such as Xiaomi or HTC. (Note: the “Occam’s Razor” Louis refers to is the logic rule stating that the simplest hypotheses or explanation is typically the best choice.) Charles’ piece is on a topic that is near and dear to Evergreen’s philosophical heart: the dangers of passive investing becoming the dominant force in the financial markets. Several past EVAs have pointed out the risks and distortions caused when a benchmark becomes an investment strategy. As we noted years ago, when passive or index-investing was a niche vehicle, it didn’t have much impact on financial markets. Now with trillions either directly or indirectly tracking various benchmarks (most notably the S&P 500), undesirable effects are becoming more significant and frequent. For example, professional investors seeking to replicate the S&P are forced to hold more of the largest components of that index regardless of valuations. Clearly, this reality amplifies both up- and down-moves, meaning that overpriced areas tend to become more inflated than they would in the past when almost all assets were run by managers who did fundamental analysis. In a similar way, passive investors wind up with less exposure to inexpensive and out-of-favor securities than they would with less of an autopilot-type influence. One could argue this is a key reason why bubbles and busts have become more common over the past 15 years. The net effect is compromised financial markets that produce a lower rate of return than in “the good old days”. Certainly, the fact that the S&P 500 has returned just 4.3% for the last 16-plus years indicates some validity to that contention. And, as we have noted in prior EVAs, just wait until this calculation is run during the next bear market. When it is, you won’t be hearing about stocks for the long-run—even though that will be precisely the time you should be. DAVID HAY Chief Investment Officer To contact Dave, email: dhay@evergreengavekal.com *The specific securities identified and described do not represent all of the securities purchased, held, or sold for advisory clients, and you should not assume that investments in the securities were or will be profitable.  Facebook and Apple are used only to explain recent well publicized events regarding these companies, and these events possible effect on the market in general.  HTC and Xiaomi are used only for illustrative purposes.  ECM currently holds Apple and may recommend it for client accounts if ECM believes it is suitable investments for the clients, considering various factors such as investment objective and risk tolerance.  It may not be suitable for all investors.  Certain clients may hold Facebook, HTC and Xiaomi in their accounts, at their discretion; these securities are not recommendations of Evergreen. Please see important disclosures included following this letter. Read More

Click here to view PDF. “It is human nature to think wisely and act foolishly.” -ANATOLE FRANCE SUMMARY - Despite rapid advances in technology, the human brain remains far more superior to even the most powerful supercomputer. - However, our brains have deficiencies that often lead to irrational and/or sub-optimal decisions. - Some of these biases or tendencies are related to social fears and pressures. Others are a function of how humans evolved over the eons. These can lead to reactions or emotions that were appropriate in pre-historic times but are often counter-productive today. They include excessive loss aversion and fear of missing out. - These flaws in our mental processing make the pervasive belief in efficient financial markets highly suspect since markets are only as rational as the underlying participants. By extension, this applies to the investment off-shoot of the Efficient Market Hypothesis: index-, or passive-, investing. - Yet, the growing popularity of index-based investment vehicles reflects the belief on the part of a growing number of both investors and advisors that markets are efficient and, consequently, unbeatable. - Evergreen disagrees with both the theory of efficient markets and the superiority of passive investing. Understanding our brain’s fallibilities and biases is crucial in avoiding the investment traps these create and in seeking to generate superior investment returns. Read More