The Grant’s Conference held in London the second week of February was resoundingly cautious in tone, if not downright bearish. Concerns generally stemmed from macro level issues with a strong focus on international fiscal and monetary policy. With so much going on in the world over the past month, it is important to note that these presentations were done pre-tsunami and just on the cusp of the ongoing Middle-East/ North African revolutions.
Hugh Hendry of Eclectica Asset Management kicked the conference off with a rather impassioned presentation espousing a high level of bearishness on the Japanese economy, bullishness on the Japanese Yen and topped it off by pounding the table on the impact of widespread malinvestment in China. Mr. Hendry tempered his outlook with the sage advice to be wary of the time frame when considering how to play his convictions; many times obvious anomalies can persist for long time periods in spite of reason.
David S. Stockman, the former director of the Office of Management and Budget under President Ronald Reagan, spoke on the impact of US debt. Mr. Stockman highlighted the all too obvious un-sustainability of current US debt levels. Mr. Stockman unabashedly stated, “The subprime meltdown was a warm-up. The real financial widow-maker of the present era is likely to be the US government debt itself.” With the US government running a fiscal deficit of 7% to 8% for the foreseeable future, Mr. Stockman predicted a debt-to-GDP level of over 100% within five years. With combination of debt monetization and this growing spending gap, demand for Treasuries may slip causing alarming consequences.
Paul Isaac, Chief Investment Officer of Cadogan Management, began by considering the ever undulation of great civilizations in his analysis of global current events. At the core of his argument, Mr. Issac stated “…I have no reason to believe (the impact of current world events) will be materially worse or more difficult than have prevailed since I started investing, so I might as well…see what opportunities exist.” With this idea, Mr. Issac illuminated several stocks which he believed presented good opportunities and ended by presenting several ideas in the US Muni Market.
Another rather bearish presenter, James Montier of GMO, advocated his view that nearly all assets are overvalued. However, despite the “truly depressing environment to allocate assets,” he did identify some areas where small opportunities still existed, such as “Mega-Cap” equities. Another space, although not easily accessible to all investors, which holds potentially attractive value is purchasing a stream of dividend income in European equities. Mr. Montier stated that these streams are essentially pricing in zero growth in dividends over the next 10 years. “This structure offers a cheap inflation hedge.”
Overall, the presentations were, as always, very enlightening and helped to illustrate several cutting edge opinions on markets and strategies for dealing with the current environment. The underlying thread seemed to illuminate the perception of an increased level of risk in the market place. While these opinions may portend possible market dislocation in some areas, speakers still cited areas where investment opportunities exist and will continue to exist should their worst case scenarios occur. To this end, I believe we must be mindful of concerns and thoughtful in investment choices, but also aware that opportunities exist and continue to emerge in these uncertain times.