Click here to view PDF. “Low interest rates cause secular stagnation: they do not cure it.” -CHARLES GAVE “Negative interest rates are the dumbest idea ever.” -JEFF GUNDLACH, the new “King of Bonds” “Laugh but listen.” -WINSTON CHURCHILL, addressing the British House of Commons, warning it once again of the rising threat posed by Nazi Germany, to derisive laughter. SUMMARY - Overwhelming amounts of government debt are among the “rich” world’s biggest threats. Unfortunately, the political will to cope with this—and the related problem of runaway entitlement spending—is nil. - Radical monetary measures—such as quantitative easing (QE), plus zero- and negative-interest rate policies (ZIRP and NIRP)—are not stimulating growth. Instead, they are producing stagnation, “lowflation”, deflation, and currency wars. - However, they have stopped the ticking of the debt bomb. They are also reversing the disadvantaging of younger generations at the expense of the older and wealthier; the latter are the big losers from the eradication of interest rates. - Investors need to adjust to ZIRP and NIRP. They are likely not going away anytime soon. - These also make it less probable the US government will resort to high inflation as a form of “stealth default” on its immense debt. - Central banks printing money to buy government bonds is supposedly the pain-free way to extinguish crushing debt burdens. However, there is no free lunch. - Monetary authorities are finally realizing QEs, ZIRPs, and NIRPs, are failing to catalyze growth. Discussions about banning high-denomination currency (like $100 bills) are gaining steam as is a debate about the merits of doing “helicopter” money drops (direct money transfers to citizens). - The Fed suspending its rate normalization scheme (after just one hike!), and the European Central Bank unveiling a raft of extreme easing measures, have triggered rallies in almost everything since early February. Energy, Canadian REITs, and gold mining stocks have been by far the stars. - US stocks are still trading way above the trend-line growth rate of the economy (GDP). There is always reversion back to that and even below. - Not trying to be Davey Downer but if things are fine why are QEs, ZIRPs and NIRPs necessary? And why is the US middle class so despondent? - There are a growing—and disquieting—number of parallels with the 1930s, though, also many differences. - Some good news: in addition to zero interest rates and tepid growth forestalling the day of debt reckoning, they may be creating a trading range market. Perhaps a vicious bear episode can be avoided, or at least delayed. - However, investors need to be nimble and contrarian. It’s imperative to overweight those areas—like energy-related last year—where money is fleeing en masse. A passive 60/40, stock/bond, portfolio won’t produce the kind of returns investors desperately need. Read More

Click to view as PDF. This month’s edition of the Evergreen Virtual Advisor (EVA) Guest issue should be a special treat for our readers or—in this case—viewers.  My great friend Grant Williams has granted us permission (thanks for the grant, Grant!) to give all of you a sample of the unique streaming service he co-founded, Real Vision TV (RVTV). RVTV has quickly become one of the most popular sources of high-level investment insights in the digital world.  Undoubtedly, its success is a function of its considerable—and ever-expanding—library of interviews with many of the smartest investors on the planet. If you haven’t tried out RVTV yet, I’d suggest you give it test-drive (or view) by watching this clip. (For more information on RVTV, please click on this link.) In this video version of our Guest EVA, Grant chats with one of Wall Street’s classiest luminaries, Art Cashin. For those of you who watch CNBC, even casually, you will immediately recognize Art and his disarmingly affable manner. Art has spent over 50 years on the floor of the New York Stock Exchange (NYSE). As a result, he provides a perspective based on this extensive history that is almost unequaled. Speaking of history, his first story recalls the fear-wracked days of the 1962 Cuban missile crisis, when the fate of human existence hung in the balance. Since I am old enough to remember being repeatedly shuttled by nuns to the supposed safety of my school’s basement back then, it hooked me right from the start. Read More

Click to view as PDF. SUMMARY This issue of the Evergreen Virtual Advisor (EVA) is our monthly edition of insights from our partners at Gavekal. Thankfully, its subject matter gives readers a chance to shift their focus away from America’s political circus, which seems to be growing more surreal by the day. You will soon read that the US is not alone in experiencing the rise of anti-establishment political figures opposed to free-trade and immigration. (For those of you with a bit more time for intriguing reads, please click on this link to access a very personal piece from Gavekal’s Charles Gave on one of the root causes of Europe’s immigration crisis.) On the other hand, for EVA readers interested in the ultimate speed-read, the following is a summary of the main article’s salient points: - The grand European integration project—which brought the euro currency into existence in the late 1990s—was a flawed creation from the start. - The prevailing political climate at the time prevented a full-scale union. Some type of crisis (such as the 2008 global financial panic) was needed to force the eurozone countries closer together. Since then, there has been halting progress toward tighter bonds. - However, the flood of refugees from the Mid-East is working against this by threatening the essential open-border structure (known as Schengen). - The refugee crisis is also fueling the rise of populist political parties, as has anger over European Central Bank (ECB) zero- and negative-interest-rate-policies that are threatening the income of Europe’s growing retirement class. - The financial fragmentation since the Greek crisis of 2011 and 2012 (which caused, for example, German banks to shed Italian loans and focus on domestic lending) is aggravating the disunion forces. As a result, cross-border financial activity flows are declining. - The European Union (EU) has been relying heavily on Greece and Turkey to provide sanctuary to the influx of refugees but this arrangement is fraying. - The rising anti-union sentiment has made fiscal integration (like sharing tax revenues between northern and southern Europe) a virtual impossibility. Consequently, closer linkage is increasingly reliant on strengthening the eurozone’s fragile banking system and making it “trans-national” once again. - While there are some encouraging developments in this regard, Europe’s great unification experiment is at considerable risk, one that will be hugely elevated this June should the UK opt-out of the EU (the so-called Brexit vote). Read More

Click to view as PDF. “Virtual reality was once the dream of science fiction. But the internet was also once a dream, and so were computers and smartphones. The future is coming.” - MARK ZUCKERBERG, Facebook post, March 25, 2014 I'VE SEEN THE FUTURE By Tyler Hay, Chief Executive Officer Recently, a client of ours, who works at Bellevue-based Valve Corporation, invited me to experience something that’s likely to have a revolutionary impact on the human race. Valve is the coolest company that you’ve never heard of, partially because it’s privately held and partly because they enjoy the anonymity. Valuing the company remains elusive, but in 2012, Forbes estimated it had surpassed Electronic Arts (EA) in net worth. At the time, EA was considered the leader in software game development. Today, EA has a market cap of $19 billion, leaving it to anyone’s best guess how much Valve is worth. My suspicion is it’s more than EA by a wide margin. Valve’s culture is intentionally Darwinian. You won’t find bosses, standard corporate hierarchy, monthly performance updates, or a dress code. Employees work on projects that interest them and are reviewed annually by a team of their peers. In a self-adjusting way, employees must work on projects where they add value. Therefore, ineffective employees, or ones who misallocate themselves to projects where help isn’t needed, receive poor scores. In talking with employees, you get the sense that this process is both appreciated and efficient. The collection of Ivy League geniuses and computer prodigies that work at Valve don’t seem to view what they do as a job; instead it’s more like they are a part of a movement toward the greater good. Read More

Click to view as PDF. CHAIRMAN WAXMAN: “You found a flaw?” MR. GREENSPAN: “I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.” CHAIRMAN WAXMAN: “In other words, you found that your view of the world, your ideology, was not right, it was not working.” MR. GREENSPAN: “Precisely. That’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.” - Congressional Hearing on The Financial Crisis and the Role of Federal Regulators. October 23, 2008, as relayed by Mike O’Rourke on March 30th, 2016, in The Closing Print. SUMMARY From the Evergreen Investment Team: - This month’s Guest EVA is based on a recent essay by GMO, a Boston-based investment advisory firm with $118 billion in assets under management. It was written by James Montier and Philip Pilkington who seek to understand why the US stock market has persistently traded at higher valuation levels over the last twenty years than in the prior century. (Note, GMO was co-founded by Jeremy Grantham, so often quoted in past EVAs.) - Contrary to what some market pundits believe, James and Philip found that the unusually elevated price/earnings ratios since 1995 are not related to low interest rates. Rather, they appear to be linked to a market increasingly influenced by Federal Reserve Open Market Committee (FOMC) meetings. Intriguingly, the higher returns seen around the time of these meetings aren’t limited to just those events when the Fed eases monetary policy or elects to stand pat. - They have deconstructed the famous “Shiller P/E” (also known as the “Cyclically-Adjusted P/E”), attempting to isolate what factors have caused its forecast error. Essentially, the authors believe the Fed has been able to positively influence investors’ willingness to assume risk. In other words, the US central bank has successfully stoked the animal spirits of market participants. (Quite possibly by creating a belief that the Fed is all-knowing and all-powerful. The exchange quoted above, between Alan Greenspan and Congressman Henry Waxman, should challenge that mindset.) - Ironically, one of the Fed’s own studies revealed that market returns on FOMC meeting dates have been considerably higher than during the overwhelming majority of trading sessions when it was not convened. Since 1985, there have been an average of only eight FOMC meeting days per year (thus, roughly 3% of trading sessions) yet these have accounted for 25% of the market’s total return! - The correlation between Fed meetings and market returns hit its peak during the Global Financial Crisis (GFC) and its immediate aftermath. However, it continues to run far above its pre-early ‘80s level. - By adjusting the Shiller P/E to account for this effect, its indications of under- or over-valuation have been much more accurate. - The so-called “Fed-put” is the notion that the US central bank has repeatedly intervened to halt bear markets. This started under Alan Greenspan when he assumed the chairmanship in 1987 and has, according to this notion, continued under Ben Bernanke and Janet Yellen. - A profound question is whether this is a permanent condition or one that will give way to an era of far more skeptical investor attitudes, characterized by a lack of faith in the Fed’s ability to influence market direction. Read More

Click to view as PDF. “Don’t you miss interest rates?” - JIM GRANT, founder, Grant’s Interest Rate Observer “The entire (financial) industry mindset is wrong here. And it’s a trap. When you promise something you can’t deliver, you structure your portfolio in ways that will kill you.” - ERIC PETERS, author of the Weekend Notes newsletter read by investment managers controlling over $800 billion in assets. SUMMARY - In the 1800s, the Colt 45 pistol was known as “The Great Equalizer”. Today, the great equalizer might be interest rates—or the lack thereof. When rates are zero, the same amount of cash flow is produced on $10 million as on $10 thousand. When rates are negative—as they now are in so many countries—the greater the wealth, the greater the loss. - Big government and big companies (or at least their senior management) are the big winners in a zero interest rate policy (ZIRP) environment. Heavily indebted governments can borrow for free—or even earn revenue—due to negative interest rate policies (NIRP). Large corporations use cheap debt to buy back stock and inflate stock options for insiders. - The losers from ZIRP and NIRP are retired or soon-to-be-retired investors. Also, pension funds and insurance companies suffer based on their need to achieve returns high enough to fund their liabilities and contractual commitments. (4% is the new 8%!) - Due to high current valuations, stocks and real estate can’t save the day for either retail or institutional investors. Formerly bubbly asset classes—like luxury condos, fine art, collector cars, small-cap stocks, and even commercial real estate—appear to be deflating or are poised to. - Bear markets in MLPs (pipelines and other mid-stream assets), Canadian REITs and emerging market debt gave investors another shot at double digit yields. However, most investors appear to have missed the window based on heavy redemptions out of these depressed securities. (MLPs and many Canadian REITs are up 30% or more in the last six weeks.) - $70 trillion in financial assets held by American investors is likely to produce 4% or less over the next five to ten years. This compares to a historic level of around 8%. The difference amounts to $2.7 trillion less of portfolio return for the US economy, with Baby Boomers being particularly disadvantaged. - Many pension plans still assume 8%-type returns with little chance of achieving that due to NIRP and ZIRP. Insurance companies are imperiled as a result of the interest rate collapse and their guarantees on existing policies. - Interest rates are now the lowest since at least the Middle Ages and probably back to when King Tut was a pharaoh not just a museum exhibit. - Despite—or because of—NIRP and ZIRP, economic activity around the world continues to disappoint. This is likely to get worse as boomers, the largest global population cohort, become fully cognizant of their compromised income condition. - There will be more opportunities to secure high returns—such as was the case with MLPs, Canadian REITs, and emerging market debt recently—for those investors who are prepared and have the courage to buy into panics. Read More

Click to view as PDF. “The mind of man at one and the same time is both the glory and the shame of the universe.” - BLAISE PASCAL, mathematician and theologian, after whom the computer language and operating system PASCAL was named CHANGE OF PACE By David Hay, Chief Investment Officer We would like to take this opportunity to update EVA readers on a couple of changes to our publishing efforts. First, Worth Wray’s brief tenure as a contributing author to our EVA team came to an end this month. We have amicably parted ways and he is homeward bound for Texas. Worth is an informed and bright young man. We are appreciative of his past work and wish him well. Second, in what we think is very good news for EVA readers, my great friend and partner Louis Gave, has graciously given us his permission to share a much greater amount of Gavekal’s publications with all of you. In the past, we have run a limited number of their reports each year as part of our “Guest” EVA rotation. This week begins the first in what we hope will be a long series of regularly relaying essays from one of the world’s leading economic and financial market research firms. Our initial edition in this regard is based on the work of Gavekal co-founder Anatole Kaletsky and two regular Gavekal contributors, Cedric Gemehl and Nick Andrews. In recent weeks, they have written on one of the most fascinating—and controversial—topics in today’s financial world: Negative Interest Rate Policy (NIRP). As noted in recent EVAs, nearly 40% of the “rich” world’s economies are operating under the influence of NIRP. It’s looking more and more like that isn’t too dissimilar from operating a motor vehicle under the influence—it might feel like a good idea at the time, but there are likely to be some serious negative consequences. Read More

Click to view as PDF. “We really can’t forecast all that well, and yet we pretend that we can, but we really can’t.” - Alan Greenspan SUMMARY BULLISH SUMMARY - The latest growth scare is over, and the US economy is set to accelerate. - The risks that drove the latest panic in global markets (US growth, oil oversupply, and a Chinese currency devaluation) were overblown and have begun to recede. - Credit spreads (the gap between what corporate and government bonds yield) peaked in February and have narrowed considerably in recent weeks. Given their extreme importance to the economy and financial markets, this is great news. - This environment is more like the 2011 correction than the 2008 with a lot of upside left to come. BEARISH SUMMARY - While sentiment has improved with the global market melt-up, economic and earnings fundamentals have not changed. - Risks are rising in the US economy and around the world as the Fed tightens after years of misallocation and foreign central banks scramble to address their own growth problems via competitive easing. - The ability of central banks to exert a “shock and awe” influence on stock markets is clearly fading. - This environment is more like the run-up to the 2008 crisis (but, hopefully, without the risk of a financial system collapse) than the 2011 correction. Read More

Click to view as PDF. “There is a meaningful risk that, come November, one of the people currently running for president will win.” - Barron’s Jack Hough. “If God had wanted us to vote, he’d have given us candidates.” - Jay Leno HUNT FOR THE TRUTH By David Hay, Chief Investment Officer Almost every golfer has heard of Harvey Penick and his classic golf instruction manual, The Little Red Book. One of the most memorable stories he tells in it details how he decided he had no future on the PGA golf tour despite being an accomplished player. What disabused Harvey of the notion of “joining the circuit” was when an up-and-coming golfer came into Harvey’s hometown of Austin, Texas, back in the 1920s. The prodigy’s name was Sam Snead. Harvey wrote that once he merely heard one of Snead’s tee shots, he realized he had no chance to ever be truly competitive with Slammin’ Sammy. That sound, which he had never heard before, convinced him in an instant that he was a mere mortal in the presence of a golfing god. That’s a bit how I feel when I read certain other financial writers. Having composed a few hundred newsletters over the last decade or so, I’ve developed an appreciation for a few of my “peers” (really, my superiors) who are truly gifted when it comes to shaping the English language around their ideas and themes. Jim Grant is one of those. Another is Ben Hunt. Ben writes a free weekly piece called Epsilon Theory (please see the end of this message for subscription instructions). He is also a PhD and chief risk officer for the $18 billion money management firm, Salient Partners. Late last month, he wrote the piece which is this month’s Guest EVA, “The Silver Age of the Central Banker”. Read More

Click to view as PDF. “Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.” - Charles De Gaulle, Leader of the French resistance during WWII and 18th President of France SUMMARY - Gold bullion and gold mining stocks have rallied 18% and 51%, respectively, in recent months after a brutal bear market over the last five years. - Given gold’s proven ability to hold its value in the face of rising inflation and reckless monetary policy, we believe it plays an important role in any diversified portfolio. - At Evergreen Gavekal, we believe it may be time to to start initiating or adding to additional gold holdings for six reasons. 1. Technical trading patterns suggest gold may finally be breaking out into a bull market (we do caution, however, that it appears to be temporarily over-bought). 2. Gold remains out of favor despite the recent rally. 3. The Fed’s ability to hike nominal interest rates is constrained. 4. The overpriced US dollar has limited room to run. 5. Real interest rates are heading lower around the world as central banks get creative. 6. Physical gold may be difficult to acquire in the coming years. Read More