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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 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

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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

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