Notes from The Big Picture Conference

David Laubach works at Scarsdale Equities, and is usually in attendance at their weekly Ideas/Strategy lunches. You can keep up with what you miss thanks to David’s excellent synthesis of what was discussed.

BR asked David to do the same for The Big Picture Conference; These are his notes (only lightly edited):


David Laubach:

I got here a little late, missed Barofsky (heard he was excellent).


Dylan Grice / Rich Yamarone       A Great Disorder Comes

Good quote from John Maynard Keynes in 1921, basically said: Inflation impoverishes a nation, secretly and quietly, creates enmity, but funds a government nonetheless.

It’s possible the Fed will NEVER remove the liquidity they’ve injected into the US economy, they may not have to, as inflation isn’t running rampant (yet).

In 2008, the big banks should have been allowed to fail, capitalism would have worked. Instead, interest rates are being pegged, creating distortions in the market. This is not exactly capitalism.

Some European countries are raiding pension funds to claim that money as an asset on their balance sheets in order to make GDP/debt ratios look better.

Although ZIRP might help win some battles in the short term, it can’t win you the war.

Japan has faced this same problem before, and opponents of their response will say that the BOJ did not try hard enough to escape deflation.

Inflation can certainly be created. Great allegory about writing $1Trillion checks to everyone.

The bond market is no longer a safe haven, as the risk/reward has dropped to unacceptable levels. Quality stocks and corporates are the safe havens now. France, then Germany, in that order are the next “problem spots” in Europe. Bond portfolios may crater prior to something showing up in France or Germany though. Japan is also scary.

From the Q&A: Chinese protests about Japanese claims to islands seem somewhat “orchestrated”, or at the very least blessed by the Chinese government. Japan should be building up their military right now in response. However, due to historical reasons, and a general lack of funds, they cannot afford to do so.

Inflation expectations are key, but velocity of money is so low right now, its hard to see anyone raising inflation expectations.

However, they have started to inch higher after the last Fed announcement, this could play out as the recovery drags on. If inflation does rise to 3-4%, then the Fed could raise interest rates and cause a recession as a side effect.

Instead, Fed will probably say that 4% inflation is acceptable and set 5% as the new warning level.

Grice recommends reading Martin Gelbert’s book about the history of the 20th Century where each chapter is one year. He’s ten chapters in. Back in 1908, nobody really saw World War I coming. But WWI was preceded by a number of ethnic borders not coinciding with geopolitical borders causing tension in the Balkans. Grice sees a similar situation in the Middle East right now. The recent dramatic inflation in Iran could be a trigger to violence in the region, when you debase a currency, you debase a culture. Iran blamed and arrested currency speculators, what else is new? Whole thing is bothersome.


Jim O’Shaughnessy: What Works on Wall Street

Study what markets will do over looooong cycles, not over the short term. Obviously, the March 2009 lows were a generational buying opportunity, BUT, he recognized this at the time. Nobody would listen, investors were frozen and could not bring themselves to act. Three things took place for the first time since the 1940’s:

1. S&P was less than 4% compounded over a time period (don’t remember what that was), since then compounding 20.27%.

2. After each of the last worst 10 year periods, the market had positive returns the next 3-5 years. And we had just had a really bad 10 year period.

3. The rolling 20-year real rate of return from 1929 to 1949 was 5.91%. For the period of 2001-2019 to match that awful return, the market would have to return 19% over 2009-2019. Likely to happen.

Following a period of negative GDP growth, stocks tend to do well over more than just a few quarters.

Three things to look for in good stocks.

1. Earnings Quality. Low current accruals, low total accruals. This shows legitimate company performance.

2. Financial Strength on the balance sheet. Ability to pay back debt, low debt, one year change in debt is good. Value is important. Cheap stocks outperform expensive stocks, seems obvious, but lots of investors buy things “on the way up”.

3. Yield. Net buyback plus the dividend yield = Shareholder yield.
Mutual Funds have had a horrible track record from 1990-2010. Invest in your own stocks.

Investor behavior is important. People are hard-wired to make certain types of decisions. Its even genetic. Flipping a coin is generally better than expert consensus. Fear, Greed, and Hope wipe out gains from investing.


Barry Ritholtz. This is Your Brain on Stocks

You can use your own notes for this. Wow, I actually do have a ton of notes on this though. I must have thought it was interesting.

Humans exhibit a tendency toward a herd mentality, and feel like there is safety in numbers.

Another Keynes quote I will butcher… “Better for one’s reputation to fail conventionally, than succeed unconventionally”.

5% of Wall Street recommendations were sells in May 2008. Just 5%.

Equity analysts are too bullish and too bearish at EXACTLY the wrong times. This seems to be a monumentally successful contra-indicator.

In August 2011, no S&P 1500 stock had a consensus sell rating from street analysts.

There is a clear optimism bias among stockpickers (and humans in general).

The ability to judge oneself is a skill in and of itself. And not everyone has the capability to accurately assess their own abilities. The more expertise one has, the awareness of weaknesses and flaws they have. The incompetent are nearly always over-confident.

Experts are generally no better than the public at picking stocks. The more confidence someone has the more likely they are to persuade someone else. BUT More self confidence correlates to a worse track record when it comes to investing.

So-called experts who are famous for hitting on a black swan event, tend to be worse at making predictions following their one success. (See Roubini.)

People tend to read what they like and agree with and ignore and forget what they disagree with. This creates a gigantic positive feedback loop further evolving a person’s sense of ability. Same goes for stocks, we cherish our successful picks, and forget the mistakes. Not good for learning.

We also tend to overvalue recent trends over older trends. As if the more recent data should be weighted more.

By the time news hits popular magazines (especially when the title reads “Is it too late to…”), its too late.

In 2013, Taxes are going up, no matter what happens. Its not a good idea to invest with your emotions or based on a political outcome anyway.

Humans value the anticipation of a financial reward even more so than the actual reward itself. This is pretty evident in a casino. Playing is often more fun than even winning.

The economy could maybe use a little recession in the next few years to set up the next long term bull market. This one should run from 2000-2012/17, given average lengths.

Contra-indicators and macro-economic factors really only come into play in investment decisions at the extreme tops and bottoms of markets.

Rising volume is no longer as important as it was for confirming market movements. ETFs are now a significant part of the market, and Ma and Pa are out almost completely of stock picking. The Volume is not good, and High Frequency Trading distorts it anyway.

If a recession took place right now, with 8% unemployment already in the economy, it tick up appreciably higher — 9-11% (really bad). So its hard to blame the Fed for doing everything possible to avoid one.

By rescuing just about everyone who needs rescuing, we’ve created a slow, long recovery process. Unfortunately, nobody knows what would happen if we didn’t do this. And we kinda knew what saving everyone would do. So go with the one you know.

Of course, the unintended consequences of a “no recession at all costs policy” could end up being disastrous too. See TBTF, and hyper-inflation, or anything by any gold bug.

The future is likely to be a mix of the two policies, maybe some pre-packaged bankruptcies. ~Sorry, you failed, but you can die peacefully, in this very nice convalescent home and we’ve already sorted your estate. Goodbye.


David Rosenberg: “Navigating the New Normal”, but it could have been titled “Everything’s really effed up.”

Finance is still a people business, this is good. You still have to go out and meet people (awesome, that what I was doing at the bar after this conference!).
We’re going to see a sector rotation to defensive stocks. This is the first time that the Fed has announced some form of easing that the market is not up about 5% a month later. In fact, the market is down 2% and falling. The way the Fed is “speaking” is not normal for a typical recovery. Things should be better. AND there’s record stimulus around. Things should be much better. This is the weakest GDP per capita during a recovery period ever, less than half of a normal recovery. Unemployment is still high, productivity growth is cooling.

Real under-employment and unemployment is really around 15%, very high considering the stimulus. Other headwinds include ongoing real estate deflation, prices are down 43% from the highs. Household credit is still contracting and down from the highs. Household net worth is still declining over 5 year periods. The Great Recession is not over.

Debt to assets and debt to income ratios want to revert to their means. This normally takes 5-7 years following a recession, this time it will take much longer.

The distribution of outcomes has widened after this recession. Fat tails are everywhere. Not good for business.

Agh, missed the Cicero quote from 55 BC, but it was a good one.

The entire world’s debt to GDP ratios are up 30% since 2007. This might be necessary in the short term, for stability, but ultimately, long term its unstable. Europe is heading into a recession and more unemployment. Monetary unions do not survive without fiscal unions and political unions. Europe is going to have to get a political union together, but not with all the current members.

The US decoupling from Europe and the rest of the world was really just a lag behind it. There’s no such thing as decoupling really, it just looks that way in the short term. The Asian crisis took 5 years to hit the US. There is an 84% Correlation between EU GDP and US. Europe’s drop in production is already hitting Asia, and export shocks are on their way to the US.

The US fiscal cliff will hit us and act like a 4% drag on GDP. Which is fine if you’re growing at 7-8% or even a few points less. But we’re not, we’re growing at 1-2% maybe. In 2010, the lame duck congress got some things done for Obama, so maybe they get this done too. But don’t hold your breath.

From 2014-2020, interest rate payments will take up 20% of revenues and the US could cross the 100% debt to GDP ratio threshold during that time.

Because of all of this uncertainty, capex spending has slowed recently. There might be a very very near term housing recovery, but in the long term, housing has a way to go. We’ve had ZIRP for 4 years, we are Japan. Carry trade is alive and well until 2015 at least, because Bernanke says so. The Fed wants to see price inflation, both Bernanke and Greenspan actively sought a wealth effect to take hold of the nation’s citizens. Earnings are falling but the market is hitting new highs (last month).

Most bond returns in the last year have been capital gains, when most equity gains have been yield and reinvested dividends. That’s not right…
Corporate bond defaults are ticking up.

The market in the 1930’s was not as overbought as this one. Also there was no social safety net in the ‘30’s, one third of the society was ag based. So that period is not really a great comp to today.

Commercial and regional banks will pick up market share as big banks are regulated to death. Canadian banks can pick up some share too, they never had prop trading.

Jim Bianco What Is The Fed’s Plan And Will It Work?
(Missed most of this one when I had to take some work phone calls; the crowd was buzzing about it though). Jon Hilsenrath is the Fed. When he writes an article, its because Bernanke told him to. Draghi is just as important as Bernanke now, Europe can move the US markets overnight.

The Fed wants you to be rich, its not going to work.


Michael BelkinReality vs. Wishful Thinking: Bear Markets and the Business Cycle, a 110 Year View

Lunch fatigue was setting in and I had reach my caffeine allotment for the day, oh no. That being said, Belkin was my favorite speaker. Never heard of him, and he was blunt and sounded really smart.

Recession is coming, his charts say so. His charts are rarely wrong. Sell things, short the market. Especially tech. You CAN own consumer staples, utilities, healthcare, and MAYBE financials. Do not own Industrials, Materials, and especially tech. Recommended some spreads using sector ETFs. Doubt that’s really the best strategy, but his chart reading was pretty awesome. Also, lives on Bainbridge, right next to Whidbey. Drives his boat to Whidbey sometimes. My in-laws live there.


Bill Gurtin: Muni’s

Don’t know much about muni’s, didn’t take great notes. Muni investors are uneducated for the most part. 50% of them own muni’s. Even their brokers are kinda stupid about them. There are market distortions that can be taken advantage of if you know what you’re doing. California is an example. Yes, there are muni defaults there, but Cali has some decent laws about paying back investors, and a history of it, and sometimes things get hit just because they have a certain name on them, but when they really have very little to do with that city with the bad name.

You can buy GO bonds, Lease bonds, Higher Ed bonds, Water bonds, and Utility bonds. Don’t buy defaulted bonds, healthcare, or redevelopment bonds, those are bad.


Sal Arnuk, Scott Patterson, moderated by Josh Brown
Good talk on High Frequency Trading. I honestly paid too much attention to take notes, as this is my main interest, being on the compliance side of things. Wish they had gone over the monumental failure of our regulators to actively police their own markets. Gigantic talent gap at the regulators too.


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