Ten reasons why a ‘Greater Depression’ for the 2020s is inevitable

After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable. And now that it has arrived, the risks are growing even more acute. Unfortunately, even if the Greater Recession leads to a lacklustre U-shaped recovery this year, an L-shaped “Greater Depression” will follow later in this decade, owing to 10 ominous and risky trends.

The first trend concerns deficits and their corollary risks: debts and defaults. The policy response to the Covid-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.

Worse, the loss of income for many households and firms means that private-sector debt levels will become unsustainable, too, potentially leading to mass defaults and bankruptcies. Together with soaring levels of public debt, this all but ensures a more anaemic recovery than the one that followed the Great Recession a decade ago.

A second factor is the demographic timebomb in advanced economies. The Covid-19 crisis shows that much more public spending must be allocated to health systems, and that universal healthcare and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have ageing societies, funding such outlays in the future will make the implicit debts from today’s unfunded healthcare and social security systems even larger.

A third issue is the growing risk of deflation. In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labour markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.

A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetised fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalisation and renewed protectionism will make stagflation all but inevitable.

A fifth issue is the broader digital disruption of the economy. With millions of people losing their jobs or working and earning less, the income and wealth gaps of the 21st-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.

This points to the sixth major factor: deglobalisation. The pandemic is accelerating trends toward balkanisation and fragmentation that were already well underway. The US and China will decouple faster, and most countries will respond by adopting still more protectionist policies to shield domestic firms and workers from global disruptions. The post-pandemic world will be marked by tighter restrictions on the movement of goods, services, capital, labour, technology, data, and information. This is already happening in the pharmaceutical, medical-equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.

The backlash against democracy will reinforce this trend. Populist leaders often benefit from economic weakness, mass unemployment, and rising inequality. Under conditions of heightened economic insecurity, there will be a strong impulse to scapegoat foreigners for the crisis. Blue-collar workers and broad cohorts of the middle class will become more susceptible to populist rhetoric, particularly proposals to restrict migration and trade.

This points to an eighth factor: the geostrategic standoff between the US and China. With the Trump administration making every effort to blame China for the pandemic, Chinese President Xi Jinping’s regime will double down on its claim that the US is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data, and monetary arrangements will intensify.

Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea. With a US presidential election approaching, there is every reason to expect an upsurge in clandestine cyber warfare, potentially leading even to conventional military clashes. And because technology is the key weapon in the fight for control of the industries of the future and in combating pandemics, the US private tech sector will become increasingly integrated into the national-security-industrial complex.

A final risk that cannot be ignored is environmental disruption, which, as the Covid-19 crisis has shown, can wreak far more economic havoc than a financial crisis. Recurring epidemics (HIV since the 1980s, Sars in 2003, H1N1 in 2009, Mers in 2011, Ebola in 2014-16) are, like climate change, essentially manmade disasters, born of poor health and sanitary standards, the abuse of natural systems, and the growing interconnectivity of a globalised world. Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly in the years ahead.

These 10 risks, already looming large before Covid-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimise many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.

Nouriel Roubini is professor of economics at New York University’s Stern School of Business. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

David Graeber: “DEBT: The First 5,000 Years” | Talks at Google

65:10
Everybody seems to be in debt, this is sort of puzzling in a way.”
65:17
And I would say, no, and one reason why is because there seems to be this feeling since
65:24
the 70’s that basically all social problems can be solved through debt.
65:28
One theory I saw, which is kind of interesting, it’s the autonomist reading, Midnight Notes
65:38
Collective, it’s a group of Italian autonomist Marxists.
65:42
But they had this very interesting reading of the two phases of post-war capitalism.
65:45
What they basically said is that after World War II they kinda gave a deal to the North
65:50
Atlantic white working class and they said, “Okay, if you guys don’t become commies we’ll
65:55
give you free education, free health care in most places anyway, we’ll give you social
66:00
benefits of various kinds.”
66:01
And social struggles between 1945 and 1975 where more and more people asking in on the
66:07
deal.
66:08
And there is a tie between productivity and wages.
66:11
So whenever, and the lines go up together, increases of productivity are met with increases
66:16
of wages.
66:17
Since the 70’s the deal is clearly off and one reason is because they reached kind of
66:21
crisis of inclusion that you can’t actually give that deal to everybody without fundamentally
66:28
changing the nature of the system.
66:30
So first minorities, so you have the Civil Rights Movement, other people who’ve been
66:34
left out of the deal want in, people in the Global South want in, women want in, feminist
66:38
movement.
66:39
It reaches a point where it just sort of snaps and you have this fiscal crisis, oil crunch,
66:46
ecological crisis and they say, “Alright, deal off, we’ll give you another deal.
66:52
No longer will wages be connected with productivity, you can all have political rights because
66:58
political rights don’t necessarily give you any economic benefits, but you can have credit.”
67:03
So the credit solves everything, everybody’s being, that’s why you have microcredit saves
67:07
the Third World, why you have 401k’s and mortgages and there’s this huge extension of credit.
67:12
And you could say the same thing happened, right?
67:15
More and more people want in on the deal and more and more people are getting credit to
67:20
the point where people they’re just doing these crazy sub-prime scams and things like
67:24
that are beginning to run the system.
67:27
And when it cracks it looks almost exactly the same, you get the oil shock, you get the
67:30
financial crisis, you get the visions of ecological catastrophe.
67:33
It’s the same thing all over again except at this point it’s not clear what they’re
67:39
[chuckles] gonna come up with next.
67:41
So, in that sense, yeah, you have this unprecedented series of bubbles, built on bubbles, built
67:48
on bubbles.
67:49
And I’m speaking as someone who’s working the Global Justice Movement and we were like
67:53
doing our studies for the G20 as part of like several intellectual collectives where they
68:00
kind of, the activists kind of told us, “Alright, well, they’re all meeting to come up with
68:03
their evil plan and tell us what their evil plan is likely to do so we can oppose it.”
68:07
And so we figure it and I guess they’re gonna have to do green capitalism, declare an emergency,
68:14
we had various ideas for what would be a viable solution.
68:17
And they kept not doing it; they just fight each other.
68:20
In fact one of the reasons why the Global Justice Movement fell into such a problem
68:23
is, like, at least in 2000 we knew what their evil plan was [laughs] and we could oppose
68:30
it.
68:31
And now they don’t seem to be able to come up with one, we had better ideas for their
68:34
evil plan than they did.
68:35
[chuckles]
68:36
So we were sitting around and saying, “Well, come on guys come up with your formula and
68:39
we can fight you.”
68:41
And they wouldn’t so they were sort of stuck on this credit like bubble system that fell
68:44
apart and they haven’t quite come up with what they’re gonna do next.

Recognizing the Scapegoating Dynamic: Coronavirus Scapegoating

Why the bulls are wrong

Equity markets have bounced well over 20% since the lows just over a month ago, so technically we are already back in a new bull market. With peak new cases now behind us in Australia, business is agitating to reopen and governments are starting to ease restrictions. With the biggest fiscal programs since WW2 and huge monetary stimulus in the pipes, are the bulls about to be proven spectacularly right? No. Not even close, according to Jerome Lander who manages the Lucerne Alternative Investments Fund.

In this 25-minute outdoor video interview, Jerome first set the stage by giving three reasons the bulls are wrong before then saying the bottom for the market could be more than 40% below where it is now:

“… it’s very easy to come up with figures around, 1600 or 1800 on the S&P 500. Obviously we’re up at 2800 on the S&P at the moment”.
Citing the risks of ongoing virus infestations, credit defaults, geopolitical risks, poor consumption and investment spending going forward, he paints a picture of a future that is vastly different from the past.

In this new paradigm, he argues, investors face the very real prospect of long-term asset price deflation as fundamentals reassert themselves, and that in this environment investors will require a completely different approach to the one that has worked for the last 40 years.

Discussion points through the interview

– Three reasons the bulls are wrong
– What could drive the bear market and how low it could go
– What the most imminent risks are, including conflict
– What ‘the new normal’ might look like
– The biggest mistakes most investors are making
– The lens investors should now view the market through
– Investment styles that reduce market risk
– A message for all anxious investors out there

You can access the full transcript here: https://www.livewiremarkets.com/wires/why-the-bulls-are-wrong

00:03
I think firstly the Bulls are pretending
00:07
this virus itself the problems gone away
00:09
and the problem hasn’t been solved so
00:11
although we’ve reached a peak in daily
00:13
new cases we we still haven’t got an
00:16
effective treatment or an effective
00:18
vaccine for the virus firstly secondly
00:22
we have valuations at all-time record
00:24
for earnings levels not with saying the
00:27
economic settings we have had we have
00:29
and thirdly I think the Bulls really
00:31
ignore the overall picture which is that
00:33
we have unsustainable and unsustainable
00:36
amounts of debt driving our economic
00:39
growth for many years now and that we
00:41
may well be becoming to the end of a
00:43
long term debt cycle which makes it
00:45
really very difficult to be optimistic
00:47
about the returns that you’re going to
00:48
get from traditional asset classes
00:50
there’s a lot of people out there who
00:52
just seem overly optimistic to me given
00:54
the the the settings we have at the
00:56
moment for investment markets so we
00:58
think about where we’re at we have
01:01
economies which are really operating
01:03
unsustainably still we keep on putting
01:06
on more and more debt we have
01:10
unsustainable situation whereby we we
01:13
keep trying to pretend that we can just
01:15
layer and layer upon layer of extra
01:17
extra debt and create some sort of
01:20
nominal growth the low amount of growth
01:21
given the amount of debt we’re putting
01:23
on and that somehow we’re going to we’re
01:25
going to be able to continue doing that
01:27
forever and I think the balls really
01:29
ignore those things so the Bulls often
01:32
focus on very short term short term sort
01:36
of settings and they’re overly
01:40
optimistic by Nature
01:41
I suspect so I think when you’re
01:46
investing it’s ideal to be flexible so
01:48
you want to be bullish sometimes very
01:50
sometimes neutral at other times and be
01:52
able to adjust yourself to the settings
01:54
and the opportunities that you have if
01:56
you think about where we’re at now we’re
01:59
in a position where valuations are
02:01
expensive you know we actually when you
02:03
price what markets are going to deliver
02:05
just normally based on historical
02:07
context given how they’re being priced
02:10
you come up with very low returns from
02:12
traditional asset markets
02:13
if you then layer on top of that you
02:17
know we’re at economically we’re really
02:20
we really look to be coming towards the
02:21
end of the long term debt cycle whereby
02:24
it’s becoming increasingly obvious and
02:26
increasingly challenging to actually
02:28
keep economic growth going given the
02:30
type of economic settings we have we
02:33
have a very imbalanced economy so we
02:35
have a lot of wealth in the hands of
02:37
relatively few parties and we have a lot
02:40
of people living unsustainably on the
02:42
basis of the fact they can keep on
02:44
borrowing money to to buy what they need
02:46
and that doesn’t really create a
02:49
virtuous circle in the long run or a
02:51
situation which can really resolve
02:53
itself favorably I think sure so if you
02:56
look at a traditional bear market you
02:57
know it sort of takes place over many
02:59
months so you don’t suddenly you don’t
03:01
see the bear market over in a one-month
03:03
period of time so if we are in a bear
03:05
market there would be strong reason to
03:07
suspect that it will take many months
03:09
for it to play out we might for example
03:12
see a significant default cycle over
03:13
time we might see further waves of virus
03:17
infestations should we not be in a
03:19
fortunate position to come across you
03:20
know better treatments or were
03:22
unfortunate with mutations or whatever
03:24
we might see all sorts of ramifications
03:26
further shocks to the system from
03:28
geopolitical risks there’s lots of X
03:31
factors that can still occur to mean
03:33
that shocks the system that mean that
03:36
people really re reassess whether their
03:39
prices they’re paying at the moment in
03:41
this rally actually are supported by the
03:44
fundamentals at the moment the the rally
03:46
the bear market rally you know is
03:48
supported by by the fact that that we
03:51
have got you know daily new cases piki
03:53
have piqued by optimism around that but
03:56
mainly really by massive central bank
03:58
liquidity and that central bank
04:01
liquidity there is a fight between bulls
04:04
based which the bull case is really
04:06
based upon central bank liquidity and
04:07
bears based on fundamentals and the
04:11
strong possibility of a high default
04:12
cycle and poor consumption and poor
04:15
investment spending etc going forward
04:18
and so you know that’s gonna be the
04:20
tussle back and forth now this this bear
04:22
market doesn’t have to be like any other
04:23
bear market we’ve seen before it can
04:24
definitely be different so I think while
04:26
history can inform
04:27
what we might expect going forward it
04:29
could equally be very very different the
04:32
thing that’s of concern to me I guess is
04:33
that many investors are assuming that
04:35
we’re going to go back to normal or that
04:37
although the asset prices are justified
04:40
and I think that I think that they’re
04:42
not there’s been lots of work done on
04:44
this to say well what is this support
04:45
what is a supported evaluation for these
04:47
markets and if we think about what what
04:51
earnings are doing this year and where
04:52
bear markets historically sort of get to
04:55
you know historically we’ve seen
04:57
valuations you know bottom at much lower
05:00
multiples and what we see now we’ve
05:03
obviously got earnings coming off a long
05:04
way this year so it’s very easy to come
05:06
up with figures around you know 1600 or
05:08
1800 on the SP obviously we’re up at you
05:11
know 2800 on the SP at the moment so
05:13
that would be a fall around circa 50%
05:16
plus to get to what you might argue is a
05:18
fair valuation level for the market now
05:20
clearly we’re not in a situation where
05:23
central banks have any interest or
05:25
wanting to allow valuations to fall to a
05:28
normal valuation level or experience
05:32
that sort of situation so they’re
05:35
fighting very hard to keep the bubbles
05:36
alive and they’re providing massive
05:38
amounts of liquidity and stimulus to to
05:41
to keep that secured basic prices afloat
05:44
now at the end of the day will that be
05:47
successful we don’t know you know how
05:49
long will they be able to do that for we
05:50
don’t know but there’s clearly a lot of
05:52
risk to the downside should for any
05:54
reason central bank’s not be successful
05:56
at continuing to stimulate stimulate
05:59
asset prices and support our set prices
06:01
one of the things I raised concerns
06:03
about was the valuations of commercial
06:06
property unlisted property and and where
06:11
that would go to going forward so you
06:12
think about the situation now with
06:14
everybody having you know a lot of
06:16
people being at home working from home
06:18
and a lot of people actually saying we
06:20
can actually work at home effectively
06:22
and employers saying well actually we
06:24
can have our employees and working from
06:25
home and they’re more productive you
06:28
simply aren’t going to have the same
06:29
sort of demand or need for office space
06:31
coming out of this coming out of this
06:33
crisis they needed before not to mention
06:35
the fact that you know unemployment
06:36
levels will be higher probably a
06:38
substantially higher so the demand for
06:41
commercial
06:41
property won’t be what it was and that
06:43
means that a lot of those you know those
06:45
evaluations probably are not sustainable
06:47
and you’re likely to see a lot of
06:49
pressures on on property property
06:52
evaluations moving forward also with
06:54
respect to you know residential property
06:56
we have to ask ourselves you know
06:58
depending upon what the unemployment
06:58
picture does and and how ugly this gets
07:01
are those valuations justified you know
07:04
can we can we really support valuations
07:06
purely on the basis of cheap money or do
07:09
we have to have people in employment
07:10
with good employment prospects being
07:12
able to grow their incomes over time and
07:16
people with the confidence to be able to
07:18
take out big loans banks with the
07:21
willingness to lend people in those
07:22
situations lots of money so they can
07:25
continue to pay the the high prices that
07:27
we have on on property more generally I
07:30
think one other issues I raised was the
07:33
valuations that are that you know that
07:34
are being used of unlisted assets within
07:36
super funds and so forth and there’s now
07:38
been more published on that whereby
07:39
people have raised the fact that you
07:41
know that valuations arguably weren’t
07:44
being priced fairly such that if you
07:46
think take the bottom of the market the
07:48
the short-term bottom in the market back
07:50
in March and the recovery since that
07:51
time a lot of super funds haven’t
07:54
actually recovered with the markets over
07:55
that period of time so if you had
07:56
actually invested at that time thinking
07:58
you were getting the bottom one of the
07:59
markets all had a been fortuitous enough
08:01
just to just to be in that situation and
08:03
you had of invested in one of these
08:04
super funds you were actually buying
08:05
into unlisted property prices unlisted
08:08
infrastructure price unlisted private
08:10
equity prices at at prices which were
08:13
inflated which didn’t really reflect
08:14
reality your fair valuation and those
08:16
valuations will need to now gradually
08:18
come back to what they really worth and
08:20
and that means is that there’s an
08:22
inequity in the way those those
08:24
investors are actually being treated
08:25
there is actually a much higher risk of
conflict post post two pandemic
interestingly enough and certainly when
you start doing funny things with your
money then also there’s a high risk of
conflict when you look at political
cycles and you think about people trying
to retain power there’s also an
incentive incentive there for them to
you know try and remove trying to move
the the attention of the populace onto
some external focus because they know
that if you’re at war with someone
you’re much more likely to vote in ink
to be conservative in that regard so you
can certainly come up with situations
whereby the likelihood of conflict you
know you can certainly assess the like
little conflict as being higher now than
what we’ve seen before
now of course we
already have a lot of conflict in the
world we have we have we have trade war
you know that’s been going on for some
time between China and us you know fight
for supremacy there we have cyber war
going on this is not something that
people necessarily focus on I talk about
but we have lots of that going on at the
moment already so the war doesn’t have
to necessarily be in the in terms of
physical confrontation we have economic
war going on at the moment and and that
can certainly be you know exaggerated
there’s a lot of focus in the media
recently on you know what was the real
cause of this forest did China you know
did China handle this appropriately when
they did certain things and certainly
you can point to those things very
easily and and be quite upset about the
fact that that maybe this problem should
have been contained a lot of earlier
than it was and it shouldn’t have been
the problem shouldn’t become the problem
that it did if certain state actors had
09:58
it behaved very differently than what
10:01
they had ever had that then they’d have
10:03
done so you know there might be a focus
10:06
of attention turned towards that and and
10:08
that might create you know D
10:11
globalization terms of people looking to
10:12
there’s a need that in fact for people’s
10:14
supply chains become much more resilient
10:16
out of this to move to move certain
10:18
industries which are strategic and
10:19
necessary or at least diversify them but
10:22
move some of them back to to kind of
10:24
more familiar territory and more home
10:26
territory in order to ensure they have
10:27
supplies of essential goods and services
10:29
for their economy so there’s a lot of
10:31
things that can happen out of this and
10:33
there is certainly a much higher risk of
10:35
conflict and I think he’s being
10:37
appreciated it’s one of those X factors
10:38
that’s out there in terms it’s not just
10:41
China there’s obviously the possibility
10:43
of conflict in the Middle East again all
10:45
prices have dropped very significantly
10:47
that’s going to be putting a lot of
10:48
pressure on those budgets and a lot of
10:50
those a lot of those those those
10:53
countries there’s obviously the the
10:56
tensions with Iran
10:57
there’s tensions with Venezuela there’s
10:59
lots of Powder Keg some places around
11:01
the world where
11:02
this can go wrong I think it’s some
11:04
things are definitely going to change as
11:05
a result of of this shock to the system
11:09
I think certainly we’re not going to go
11:12
back in a hurry to the levels of
11:13
unemployment that we had previous to
11:15
this shock very easily so we now have in
11:18
the US unemployment fast approaching
11:22
about 20% of the population and although
11:24
we may on the other side of this once we
11:26
do and if we do get to a solution to the
11:30
coronavirus have a rapid sort of
11:32
comeback in unemployment
11:35
it won’t quickly come back at all to
11:37
where it was before so we’re going to
11:39
come out of this with a lot more
11:41
unemployment and certainly a much more
11:44
challenged consumer than what we had
11:46
before and that will mean that will come
11:51
back with a lot of people much more
11:52
hesitant in the way they go about their
11:53
daily business and the way they choose
11:54
to interact with the world is it safe to
11:57
go and do the things you did before do I
12:00
you are you are you willing to sort of
12:02
travel overseas and go to exotic places
12:04
like you were before are you in a
12:06
situation financially where you can even
12:08
afford to do that will you be confident
12:11
in your ability to take on long term
12:13
debt and your ability to pay pay off
12:15
that debt given the fragility that
12:18
you’ve just learned with respect to your
12:21
employment prospects there’s a lot of
12:22
there’s a lot of reason to think things
12:24
will some things will change permanently
12:26
as a result of this crisis one of the
12:29
concerns I have is that when you look at
12:31
the big picture we have an economy
12:33
that’s operating it
12:34
you know that’s this size say you know
12:36
we’ve got an economy sort of this size
12:37
and we have asset prices which are this
12:39
size so there’s a massive misalignment
12:43
between the size of our asset prices and
12:45
the size of our markets and the size of
12:47
our real economy and furthermore we’re
12:49
not really growing this real economy you
12:51
know we don’t have and and this crisis
12:52
is really going to accentuate that even
12:54
further we’ve got a kind of low
12:56
productivity economy we haven’t actually
12:59
got the right settings to grow the
13:01
economy strongly and it’s laden with
13:04
debt you know basically and with the
13:06
debts been used to boost asset prices to
13:08
these levels and that’s just not a
13:09
sustainable picture long-term so
13:11
investors really should be conscious of
13:13
that in the back of their heads they
13:14
should be thinking and
13:16
really safe if I just go and buy you
13:18
know a broad basket of equities so I
13:20
just invest in a traditional way
13:21
am I really safer I’m really taking the
13:23
risk that one day this big these asset
13:26
prices that are all the way out here
13:28
this massive on the back of this massive
13:29
financialization and massive easy money
13:31
on that central banks have provided gets
13:34
collapse towards the size of the real
13:35
economy alternately do I really believe
13:38
with the way we’re operating the
13:39
economies today are we going to grow
13:41
those economies rapidly so they ask they
13:44
grow you know they grow the asset
13:45
they’re going to be asset prices so to
13:47
speak I think if you look at either
13:49
those situations there’s strong reason
13:51
to think that there’s going to be at
13:52
some stage you know you know there’s a
13:54
there’s a gravity that’s pulling asset
13:56
prices down there’s a force there that
13:58
asset prices actually naturally want to
14:00
collapse and the settings were right now
14:01
we have massive deflationary forces
14:02
operating on our set prices they want to
14:05
collapse the only thing that’s keeping
14:06
them up is really central bank easy
14:09
money and and that’s that’s becoming
14:13
harder and harder to do the real
14:15
question mark out of this is whether we
14:16
gonna get one more bubble you know
14:18
whether they manage to float those I set
14:19
prices higher again into one more even
14:21
bigger bubble how long will that last if
14:24
they manage to do that or whether this
14:26
is it this is the end of the long term
14:28
debt cycle and we have to change the way
14:30
we everything will change basically all
14:32
the things will change to mean that you
14:34
know the the returns you get from being
14:36
invested in a traditional way
14:38
long equities long property all along
14:41
all these long debt basically lot read
14:43
through an assets gets collapsed down
14:45
and so you know for me I can’t go to I
14:47
can’t I can’t sleep at night if I was
14:49
operating under that paradigm with that
14:51
with what I know now I wouldn’t I
14:53
couldn’t sit there and look at that
14:54
setting and say I should put all my
14:56
investors into that sort of risk in a
14:57
very concentrated fashion and just hope
14:59
it’s all okay because I think there’s no
15:01
reason when you look at it I think that
15:03
it will be okay in the long run so you
15:05
have to operate on the assumption that
15:07
that can collapse and therefore you have
15:08
to do things very differently from the
15:10
way most people are actually doing it
15:11
most investors are really operating
15:13
under a traditional or historic paradigm
15:15
so they’re really they’re really you
15:17
know they’ve got their equity dominant
15:18
portfolios and they really operate under
15:21
the assumption that this is a strategic
15:22
asset allocation type framework which is
15:24
based on historical returns and they’re
15:26
basically assuming that
15:28
the portfolio’s ahead for the last 40
15:30
years are the right portfolios are run
15:32
with going forward now I don’t believe
15:34
that is the case I think they’re quite
15:36
clearly we can mount a very very strong
15:38
case for why real returns will be very
15:41
low from here looking forward on the
15:43
basis of valuations or pond on the basis
15:45
of the unsustainable economic settings
15:47
we have and on the basis of all the
15:49
risks that are out there that were that
15:50
the world’s facing that investors are
15:52
facing that just aren’t being priced
15:53
into markets and and on the basis of
15:56
that I think you really need to you know
15:58
if you’re really assessing the world or
16:00
thinking about how risk it really is and
16:02
also thinking about what investors
16:04
really want for their money
16:05
you know this is don’t want a roller
16:06
coaster ride they don’t want to go up
16:07
and down like a yo-yo and end up going
16:09
nowhere at the end of that they want to
16:11
actually have absolute returns with low
16:13
risk of large you know substantial
16:15
losses and have their money protected
16:17
and genuinely diversified and if you’re
16:19
just running a portfolio which depends
16:21
purely upon you know interest rates
16:23
moving from very high to very low and
16:25
upon debt levels continuing to expand at
16:27
extraordinary and unsustainable rates
16:30
you’re not really running running a
16:32
portfolio that’s suited for what we’re
16:33
facing the next five or ten years I
16:36
think one of the things investors often
16:38
underappreciated as well is that you
16:39
know it’s geometric returns that matter
16:41
to most investors over time it’s not
16:43
arithmetic ones so if you return ten
16:45
percent this year ten percent next year
16:47
and ten percent the year after that but
16:48
then you do you do minus 30% you know
16:51
you’ve actually you’ve actually lost
16:52
investors a lot of money overall and
16:54
achieve nothing so the whole the whole
16:57
name of the game investing for the long
16:59
term is to make sure you avoid large
17:01
losses because if you have if you
17:03
experience large losses and you exposing
17:04
vistas to large losses and you’re not
17:06
you’re not giving them what they need or
17:08
want and you’re not really doing a good
17:10
job for them and I think our industry
17:11
really at the moment under the
17:12
traditional paradigm it’s it’s operating
17:15
under is really giving investors that
17:17
experience and it’s it’s really
17:19
necessary for a lot of people to sit
17:20
back and think you know given what given
17:22
what you know from operate from first
17:23
principles is this the way it would
17:25
design a portfolio for today or is this
17:27
the way the portfolio has been designed
17:28
a long time ago on a very with very very
17:32
different investment settings you’ve got
17:34
to assume that that asset prices are
17:36
going to be very low in the long run
17:37
you’ve got to assume that you know
17:39
crises are a normal part of the way
17:42
you know you manage money you have to be
17:43
your portfolio has to be resilient to
17:45
crises basically because this isn’t
17:47
gonna be the last crisis we face we
17:49
can’t just sit here and say this is a
17:50
one in a hundred year event and it’s
17:51
gonna go away even if we do somehow
17:53
manage to go over the coronavirus very
17:55
soon which as we’ve talked about there’s
17:57
no strong reason to think that will be
17:59
the case but let’s let’s say that we do
18:01
they’ll still be further crisis because
18:03
of the way we’ve set everything out and
18:04
because of the risks that there are in
18:05
the real world so we have to build a
18:06
portfolio that’s resilient to Christ as
18:08
it can still make us money and still
18:09
meet the objectives that we have now to
18:11
do that unfortunately we can’t all do
18:13
that
18:14
we can all do that by just investing in
18:15
a traditional way so we can’t say let’s
18:17
go and invest in a risky way let’s go
18:19
and chase equity risk and property risk
18:20
it inflated valuations and which is what
18:23
by the way think just about the entire
18:25
industry does so what I’m saying is that
18:27
the way the entire industry operates is
18:29
is flawed that’s what I’m basically
18:31
saying and in terms of what the
18:33
individual investor actually needs it’s
18:35
based on historical paradigm that
18:37
probably isn’t going to work very well
18:38
so we have to think how do we get away
18:40
from those risks you know if the stove’s
18:41
gonna be really hot and really dangerous
18:43
to touch how do i how do i trying to
18:46
avoid touch that i have to think very
18:47
differently you have to do something
18:49
very differently to what to what they’re
18:51
doing have to expose myself I have to
18:52
minimize that risk basically so you need
18:55
to have a lot less risk exposed to the
18:57
traditional long-only type of investing
18:59
and you have to move much more into a
19:01
more conservative more active more more
19:07
sort of long-short way of looking at the
19:09
world
19:09
so more skill-based
19:13
strategies basically so a lot of so a
19:17
lot of what I focus on is you know
19:18
finding skilled strategies that I can
19:22
use combined combined in a portfolio to
19:24
mean that I can get a return which is
19:25
along with what investors actually won
19:27
which isn’t as dependent upon
19:29
traditional asset process and
19:31
traditional asset Marcus remaining
19:32
inflated because that’s a very binary
19:34
risk so if you really want to build a
19:36
diversified or balanced portfolio you
19:38
need to think about how do i how do I
19:40
minimize the exposure to interest rate
19:42
risk you know how do I minimize the
19:44
exposure this asset price inflation risk
19:47
how do I make sure the portfolio can
19:50
survive the cry
19:51
SIB again face going forward so with
19:54
life basically what we do is we look at
19:56
we look for skills underlying
19:58
investments managers and strategies that
20:00
really bring something different to the
20:01
portfolio there’s not heavily dependent
20:04
upon you know markets so you want to
20:06
find sources of return that don’t depend
20:08
upon the markets basically going up to
20:11
achieve a good result for investors and
20:13
that’s why we’ve had such resilient
20:16
returns assess resilient results put
20:17
part whose have managed to find those
20:20
returns and we’ve managed to combine
20:21
them in a way such that we manage a lot
20:23
of the risks that are that are out there
20:25
and ensure that you know investors have
20:28
a have a have a true to label type
20:30
experience now investors in life you
20:34
know are basically looking for absolute
20:36
returns we have low risk of large
20:37
capital losses I mean one of the things
20:40
are published on as an example of
20:41
something we have used in the portfolio
20:43
which is a more traditional sort of type
20:45
of exposure in a sense but which you
20:48
know even other investors could could be
20:49
using a lot more of is precious metals
20:53
precious metals have been in a bull
20:55
market for some time now there’s still
20:57
strong reason to expect that bull market
20:59
might continue it’s amazing when you
21:01
look at you know your every Superfund or
21:03
average large institutional investor out
21:06
there how little if anything for having
21:09
precious metals it’s incredible giving
21:11
the settings we actually have at the
21:12
moment and it’s just an example of what
21:13
I was talking about before that most
21:15
investors really aren’t thinking outside
21:17
the square and aren’t really trying to
21:19
adjust their portfolios from a
21:21
historical paradigm to one which is
21:22
better suited to the sort of situation
21:23
we face today if you actually looked
21:26
under the hood of the way a lot of these
21:27
these investors operate you would
21:29
realize that bringing in an idea that’s
21:31
kind of considered you know
21:32
non-consensus is getting it into the
21:35
portfolio is actually quite difficult so
21:37
there might be in individual investors
21:39
within large institutions who actually
21:41
believe and who are themselves investing
21:43
in gold but they won’t be able to get it
21:45
in past Syria their investment
21:46
communities or their investment boards
21:48
and get it into the portfolio in any
21:50
meaningful degree I mean I saw a study
21:51
recently suggesting that even though
21:53
historically institutions had a couple
21:55
of percent of their portfolio in gold
21:58
more recently was only half a percent
22:00
which is incredible in this massive bull
22:02
market that were actually been on for
22:03
some time now
22:04
it’s amazing so some of the long short
22:06
exposures we have for example there’s
22:08
that one of the strategies that’s that’s
22:10
worked for a long period of time is in a
22:11
long short land it’s basically being
22:13
long you know higher quality companies
22:15
and low you know lower quality companies
22:17
there’s a generic sort of buckets so we
22:19
think about that there are a lot of
22:21
companies on the stock exchange which
22:23
really aren’t good companies you know
22:24
you shouldn’t be investing in them so
22:25
when you buy an index fund you’ve got an
22:27
exposure automatically to all these
22:29
crappy companies you’ve got exposure to
22:30
everything
22:31
you know actually differentiating
22:32
between the good companies and the bad
22:33
companies people are actually adding
22:34
economic value of creating value over
22:36
time and people who aren’t so the
22:39
benefit of being long short is that you
22:40
can you can you can actually say look
22:43
these are these are good companies these
22:44
are actually adding you know creating
22:46
value for their shareholders over time
22:47
and on the other hand here we have a
22:49
whole bunch of let’s call them bad
22:51
companies in and sometimes these bad
22:54
companies are really are really bad
22:55
companies they’re fraudulent for example
22:57
there’s a lot of frauds fraudulent
22:58
companies that are on stock exchanges
23:00
around the world and in the long run
23:02
they’re going to burn their investors so
23:04
if you’re able to create a basket of of
23:06
shorts to sort of fraudulent companies
23:09
or mismanage companies or highly
23:11
indebted companies at a time when the
23:13
economy’s turning south all sorts of
23:15
different strategies you can use as a
23:16
longshore manager to to have that bucket
23:19
of low quality companies and over time
23:21
the strong reason to expect you get a
23:23
you get a relative return out of that
23:24
that the good companies will actually
23:26
outperform the poor quality companies
23:28
and you’ll be able to extract a return
23:30
that’s not depend upon whether the
23:31
markets go up or down but it’s dependent
23:33
upon whether those good companies
23:35
outperform those bad companies over time
23:36
and and that sort of strategy is one of
23:39
the strategies we use if you think about
23:41
traditional asset assets if you like the
23:43
original asset classes are things like
23:45
you know equities bonds cash property
23:49
you know these are all considered sort
23:50
of traditional asset classes the ones
23:52
that make people feel most comfortable
23:54
most familiar with the ones that are
23:56
most mainstream and most you know used
23:58
in a traditional sort of paradigm you
24:00
think about alternate eternities they’re
24:02
really everything else so alternatives
24:04
can can be alternative asset classes so
24:06
things like precious metals often
24:07
considered alternatives some people even
24:10
think about
24:10
unlisted versions of of listed asset
24:13
classes as being alternative I don’t
24:14
really see them as alternatives I see
24:16
them as unlisted
24:17
unlisted versions of the listed version
24:19
but they still expose the underlying
24:21
similar economic risks for me but when I
24:25
think about alternatives I’m thinking
24:27
more about liquid alternatives so ways
24:29
of taking traditional asset classes but
24:31
operating with them very differently so
24:32
for example you know market neutral so
24:34
your long one company your short another
24:36
company against it you’re taking out the
24:38
market that you you you you taking it
24:41
down to another level and saying you
24:42
know within that within that asset class
24:44
what is there that I want to own what is
24:47
there that I don’t want to own what can
24:48
i what is going to outperform something
24:50
else so you totally getting a different
24:52
return stream out of it and that’s
24:54
that’s an alternative strategy in my
24:56
book it’s understandable that investors
24:59
are confused because lots of things are
25:01
changing and it’s important that your
25:03
investment approach also changes will be
25:05
my message
25:06
if investment markets if you don’t
25:08
believe investment markets are going to
25:10
offer strong returns going forward if
25:12
you don’t believe like I do that
25:13
economies are well set up to encourage
25:15
high productivity growth that the
25:18
valuations are attractive that settings
25:20
are sustainable that we don’t have a
25:22
debt bubble that’s a big problem in this
25:23
sort of thing like if you if you believe
25:25
everything is okay and you can continue
25:27
to invest in a traditional way and have
25:28
your portfolio or your your wealth and
25:30
your future dependent upon that but if
25:32
you think things that you know if you
25:34
think things aren’t like that and think
25:35
the world’s different place from that
25:36
now I think you really need to think
25:38
have I got the right investment approach
25:40
at all haven’t got the right investment
25:41
partners do I need to do something very
25:43
differently than what the industry at
25:44
large offers me and I think you do I
25:47
think people absolutely need to think
25:48
differently about how they manage money
25:50
and what’s a line with what they’re you
25:52
know not knowing that the way the world
25:54
is but what they are trying to achieve
25:55
for their portfolios the truth is most
25:57
of us don’t want a rollercoaster ride we
25:59
don’t want to be on this you know seesaw
26:01
and end up going nowhere we want to
26:03
actually have you know steady more
26:05
reliable more skill-based returns for
26:08
investment managers that aren’t depend
26:10
upon everything being okay and I don’t
26:12
expose us to so much crisis risks that’s
26:15
out there so my message to investors
26:17
will be just that you know really think
26:19
about whether you’ve got the right
26:20
alignment for what you’re trying to
26:21
achieve and is there a better way is
26:22
there a different way and do I need to
26:23
think
26:23
do I need to make sure I’ve got the
26:24
right investment partners for that

Stocks are in little danger of retesting the March low, top strategist Art Hogan says

National Securities’ Art Hogan believes the consensus view that stocks must retest the March low is wrong.

According to Hogan, there are too many unprecedented factors, including an intentional decision to freeze the economy, to suggest the market will follow a preset course based on historical trends.

“That pace at which we got to the correction here is the fastest that we’ve ever seen,” the firm’s chief market strategist told CNBC’s Trading Nation” on Friday. “Usually it takes the Fed and certainly Congress a much longer time to adjust to the here and now and to find the corporate polices to support the economy, and they did that in record time.”

Hogan’s view may be on the more optimistic side, but he’s not expecting a sharp, sustainable rally.

We’re in a middle ground where we’re a little bit more than 20% off the lows [and] a little bit less than 20% from the highs,” he said. “This is going to be a place we churn through for most of the first half.”

Stocks kicked-off May deep in negative territory. But since the March 23 low, the S&P 500 and Dow have surged 23% and 24%, respectively.

The rebound doesn’t surprise Hogan.

Five days before the S&P 500 and Dow hit their lows, Hogan predicted on “Trading Nation” stocks would bottom before coronavirus cases peak in the United States.

Now, he’s seeing some progress on the virus front.

“If new cases continue to plateau, then 2021 is certainly going to look a whole lot better than 2020,” he added. “I would argue that the second half looks way better than the first half of this year.”

Hogan, who has $15 billion in assets under management, speculates a slow and deliberate reopening of the economy will likely be successful and spark a demand frenzy.

There has been a lot of delayed consumption,” he said. “There is going to be maybe some pent up economic energy that explodes into the fourth quarter and certainly into 2021.”

It’s a scenario, according to Hogan, that should put Wall Street and Main Street firmly back into the green.

“Corporate America has the ability to get back into place relatively quickly. This is not a great financial crisis,” Hogan said. “Going into this, the U.S. economy was in pretty good darn shape, and so was corporate America’s balance sheets.”