Some of the main concepts that took center stage at this year's conference - debt, interest rates, and geopolitics - have all been ongoing talking points here at Sandstone for quite some time.
Debt
Cheap money has propelled stock buybacks to all-time highs at the expense of future growth via capital expenditures. Balance sheets are at extremes with BBB-rated corporate debt (one step above 'junk' status) at its highest share in history. Boomers are unprepared for retirement due to lack of savings and debt concerns, while millennials are struggling under the burden of massive student loans. Incentivized by cheap money, investors have been forced out the risk curve to achieve returns.
Interest Rates
The overwhelming consensus is predicting a lower interest rate environment. Internationally renowned economist Lacy Hunt presented two theorems arguing that:
- Increasing federal debt ultimately leads to lower, not higher, interest rates and diminshing returns. The debt stimulus provides transitory gains, and as the debt burden expands, it creates a weaker environment of slower economic growth and inflation.
- Monetary tightening eventually leads to lower, not higher, interest rates. As debt productivity falls, the velocity of money declines, making monetary policy increasingly asymetric and inefficient.
Geopolitics
To nobody's surprise, China and the US dominated the geopolitical conversation. During a China panel, none of the four speakers were confident that a meaningful trade agreement would materialize. In the China camp, belief is that not all has been bad from the trade war standpoint - it has forced them to shore up relationships with other trading partners (India, Japan, Korea). Tensions between the two countries remain high.
A Contrarian Thought
During Louis Gave's presentation, he posed the following two questions to the audience.
"Almost a decade ago, when all central banks started printing money, who thought we would see higher inflation?"...most hands went up.
He then asked "Who still thinks that today?"...most hands went down.
With the consensus dismissal of any threat of inflation, he went on to argue reasons to be mindful (ie. a weaker USD and higher oil prices). Perhaps some inflation hedging in the portfolio might be wise.
Expert Takeaways
- Long fixed income (various durations and jurisdictions).
- A market decline should see a flight to safety into USD in the short-term.
- Longer-term, the USD heads lower as the Fed prints money to help ease the burden of excessive debt and foreign demand weakens.
Bottom Line
Truth be told, the overall conference sentiment wasn't particularly optimistic, which highlights the importance of balancing risk. Some things to consider:
- What if inflation surprises to the upside?
- Have you positioned for slower global growth?
- Are you ready for possible currency devaluations?
Attending global conferences like SIC provides our team with a valuable perspective on the future that will help create possibilities for your financial future.
“There are no sure things. You can’t drive straight on a crooked road; there will be times of better performance and times of worse performance. You have to have your emotions under control.”
Howard Marks