Rough notes from the September 2018 First Eagle Investment Media Breakfast. This first appeared on ValueWalkPremium.
- How to think about the decade ahead?
- Debt imbalances
- Geopolitical
- Passive versus active
Q2 hedge fund letters, conference, scoops etc
- Business cycle – what the weather is in investment climate
- When things feel good, it is risky, when things feel terrible, there is opportunity
- During Lehman felt bad, but opportunity of lifetime
- Unemployment below 2007, 3.9% unemployment, 2% growth in decade
- Economy has already recovered, behind us in rearview
- What is sustainable rate of growth in us economy?
- Corporate profit growth in medium term
- Wage inflation, close to 3%, decade high
- Companies invested more, depreciation going up
- Oil prices more than doubled since lows (tax on consumer discretionary)
- Interest rates up, yield curve at 3%
- Headwinds: asset prices reflect degree of complacency
- Risk perception in asset markets is low
- Price gold relative to S&P is at low level
- Credit low, implied volatility is low
- Highly abnormal, fiscal contraction at peak, ease at bottom à different dynamic today
- 4% budget deficit range,
- In 1990s, there was a budget surplus when unemployment is below 4%
- Fiscal picture of US is weak, short term help corporate profit margins
- Late cycle fiscal stimulus
- It is behind us, risk factors looking forward
- Fiscal consolidation, headwind for corporate margin
- Corporate profits due to fiscal stimulus, late cycle confidence
- Currency headwinds in second half
- Fiscal tax cuts à not all companies will hold on to those tax cuts, monopoly and oligopoly will benefit
- Others will compete them away, pass the prices to consumers
- Observe in rear vision, things are above average
- A lot of good stuff happened, be realistic with prospects
- We perceived we went through great deleveraging but we did not
- Sovereign sector debt is high
- US government debt, high same with European and Japanese
- Emerging market debt to gdp high
- China very high
- Range of economies who will find in difficult to move around debt, especially high debt
- For those without financial flexibility, it will be hard to move with the debt
- Debt levels bloated around the world
- Hard to create nominal growth
- We are in a window of leveraging economy, see nominal growth
- Look at Japan in past 20 years
- Growth in Geopolitcal risk
- Exogenous forces
- Rise of east, insecurities in west
- Trump trade, when China’s currency is overvalued, wrong timing
- Period of growth in China, expected converge on Western norms
- Has not, remove presidents term, one of critical geopolitical moment
- Automation of manufacturing à displaces traditional workforce in short term
- Long term they will find their way back
- Short term created disequilibrium in economies
- Growth of east, contributed to displacement within nation, even though lessened displacement around the world
- Forces playing out everywhere, similar around the world
- Rise of populous movement
- These trends applying across world
- Political themes can influence business
- All good stuff past, we have not deleverage, sovereign sector has not deleverage, layer of geopolitical complexity
- Disequilibrium in existing systems
- Where do you find opportunity?
- High levels cash
- Right character business, at prices reflecting modest expectation
- Gold, as potential hedge
- Price gold depressed relative to risk assets
- Consumer-able commodities
- Weakness of emerging markets à consumer staples, viable free cash flow yield
- Active versus passive
- Environment where assets gone up, beta risk has been ridden, underperforming active
- Outlook can be very different going forward
- Exposed to forest fires
- Largest sectors experienced largest permanent capital impairments
- Largest issuers are source of problems
- Usually exposed to most expectations
- Mitigating risk, do not try to predict short term
- Passive is willful ignorance, low cost strategy presumes markets efficient
- The more successful it is, the more it is exposed
- Active is risk mitigation
- Prepare yourself for a more difficult environment
- 5% cash, a little less than high, cash has been countercyclical
- 10 year average holding
- Cash grows as residual discipline
- Increase in sovereign and corporate debt, will fed provide liquidity to market
- Typically excessive debt for sovereign, have low interest rates
- But in corporate, credit spreads blow up
- Private debt defaults, sovereign, amortize
- Do interest rates keep going up? Are we at peak?
- Sovereign debt can play different ways
- How to implement currency hedge
- Approach to currency is resonant
- Hedge if currency is overvalued, and asset is cheap
- Thoughts on growth versus value
- Price we pay versus pacing of business development
- Momentum, if you do not see good business development, but price going up, a lot of risk
- Risk in growth is not identifying sustainability
- Risk in value is fate may play
- Lower discount rate on longer term
- Some sectors have been structurally impaired during crisis
- Emergence of tech platforms, global scale quickly, dis-intermediated many local business
- Fate risk
- Never shortage demand for common sense investing
- What could you explain international corporate debt and implications? Do you seeing buying opportunities in emerging markets?
- State owned in China, rise debt
- Looking at potential defaults
- Expect china to ease fiscal policy, corporate debt may transition to sovereign, sovereign perception risk factor, may transition to different risk bucket
- Capital structure of banks, questionable
- Financial sector in Europe dependent on central banks
- Excesses in telecommunications space in Europe
- Currency collapses in Argentina and turkey
- Why is gold cheap relative to GDP?
- Gold is inverse to price of risk in some ways, environment of risk seeking
- Gold negatively correlated with strength of dollar
- Real interest rates going up, bad for gold
- Trumps easy fiscal policy negative for gold in short term
- Business confidence has been headwind for gold
- Supply growth for gold, way below money supply growth
- Dollar growth is high
