Thoughts from the Frontline: Special Updates from the Strategic Investment Conference​

By Worth Wray

Good morning from sunny San Diego, California!

As the sun rises on the second day of the Strategic Investment Conference, I am absolutely blown away. John and Altegris put on an amazing show, and this is simply unlike any investment conference I have ever attended.

Let me explain…

In my experience, these industry events are usually more about networking than content. I go to investment conferences in hopes of expanding my thinking and challenging my preconceived ideas about the world… but all too often I find myself sitting in half-empty auditoriums listening to rock-star economists who are resting comfortably on their laurels rather than bringing their A-games.

At your average conference, over the course of several days and several dozen presentations, I usually expect to hear only a handful of truly original ideas… but not here. Here, I can hardly keep up.

Instead of skipping sessions to explore the resort or lounge by the pool, here everyone stays in the room. It’s so refreshing to see 650 people guarding their seats, hanging on every word, and drinking from a fire hose of transformational ideas.

Day 1 started off with the king of modern-day economists, David Rosenberg, who goes on ruffling a lot of feathers. Rather than obsessing over whether the state of the global economy is good or bad, Dave challenged us to see beyond the deflationary headwinds and focus on how things are changing at the margin. Markets move as things get better or worse; and at the margin, Dave argues, inflation pressures are building. I know this sounds odd to a lot of us who are still worried about deflation; but Dave notes that out of 140MM workers in the large, insulated US economy, roughly 40MM higher-skilled workers have the bargaining power to push wages higher and turn the inflationary dial… even as low- and medium-skilled workers see their wages decline.

Next up, we had an epic debate between Bloomberg Senior Economist Rich Yamarone and Jefferies Chief Market Strategist, David Zervos. Rich is worried that after six years of fragile growth, the US economy is prone to recession and skating on very line ice. He argues that the middle class is getting hollowed out, because no positive wage pressure can be exerted by the vast majority of Americans. More people are being forced to take multiple jobs to make ends meet, in part because the Affordable Care Act is changing the way businesses employ nonessential workers.

With his thumb on the pulse of the real economy through his Orange Book research, Yamarone gives us his top five real-world indicators, which tell a story very different from the official macro data. Meanwhile, in high spirits and with a powerful faith in central banks, Zervos exhorts us to be lovers, not haters. Deflation cannot take hold, he asserts, as long as the Federal Reserve is pouring money into the system. Today, sitting in low-volatility cash is more dangerous than being in higher-volatility stocks, he argues. David laid out two choices and encouraged the crowd to pick a path.

Then we moved on to a comprehensive look at the global economy as the always brilliant Grant Williams and Jonathan Tepper took the stage to share their ideas about China, Japan, Europe, and other markets. Jonathan argued that low volatility and tight European credit spreads are not necessarily signs of lasting recovery but rather the sort of irrational calm that always comes before a crisis. Expanding on Jonathan’s point, Grant warned that if and when this bubble of complacency pops, the impact will shake the world. And then he explained how sudden shifts in confidence in China and Japan could tip off the next global panic.Patrick Cox, who writes Mauldin Economics’ Transformational Technology Alert, ran(!) us through a jaw-dropping, hugely inspiring PowerPoint show and commentary, one of the highlights of which was his prediction that the US energy boom will enable the widespread adoption of robotics here, which will reverse 40+ years of manufacturing outsourcing.

We heard from several other excellent speakers during the day, including Gary Shilling, and Vice Admiral Robert Harward… a great American who once commanded the Navy SEALS and who gave us all hope that with the support of the greatest warriors in human history, America’s best days lie ahead.

There’s lots more I could share with you about yesterday’s developments, but it’s time to hit the send button. John Mauldin is about to take the stage with one of the most powerful presentations I have ever seen, and I don’t want to miss a second. We have been working on this speech for more than six weeks, and I am inspired by his ability to find hope in the midst of debt-related worries and to look into and through the macro chaos to give us a profoundly positive vision of the future.

Thankfully, I have not had to take copious notes, because there’s no way the pace of this event would allow me to keep up with all the information coming at me.  To fill in the blanks, I’ll be able to refer to the recordings of all the authorized presentations from the event when my MP3/CD Audio Set arrives in a few weeks.  If you couldn’t make it to SIC but want to tune in to the insights shared by 20 of the world’s top independent thinkers, you can order the audio set here today at our discounted pre-event price. Based on what I’ve already experienced at the conference, I can tell you the SIC Audio Set will be loaded with invaluable information and worth every penny.

Thanks again for your support, and I hope you can join us next year!

Worth Wray
Chief Strategist, Mauldin Companies

By Worth Wray

Hello again from the Strategic Investment Conference in San Diego, California!

John Mauldin took the stage on day 2 with a powerful message: while the human brain struggles to anticipate exponential change, our economic future quite literally depends on a race between two accelerating curves – debt and innovation.

Just as exponential growth in government debt starts to destabilize the global economy – with enormous and growing risks to growth and productivity in Japan, the United States, Europe, China, and even many of the emerging markets – John believes the constant doubling of computing power since the late 1950s has brought us to the point where our technological capabilities are taking exponentially larger leaps every year. That constantly accelerating computing power is enabling innovation so profound and disruptive that it looks and feels like magic.

The question John asks is, “Can the private sector innovate and create wealth faster than governments and central banks can destroy it?” We are optimistic that the human race will continue its march forward in the coming decades, but bad policy can stifle innovation and hurt us economically. Ultimately, John’s question will need to be answered on a country-by-country basis… and the distinguished speakers who followed John today gave us a lot of additional food for thought as we contemplate the path ahead.

Former Speaker of the US House of Representatives Newt Gingrich asserted that the pioneers of the future (the dreamers, innovators, and entrepreneurs) will eventually break out past the prison guards of the past (irresponsible and overprotective governments, central bankers, and special interests). Ultimately the rising tide of productivity growth will allow our economic future to transcend past experience, but those gains will be unevenly distributed during the transition – continuing to fuel a political shift from right to left.

We heard a similar view from former President Reagan’s most-quoted living author, George Gilder, who argued that the study of economics must evolve and embrace the lessons of information theory, as he outlined in his 2013 book Knowledge and Power: The Information Theory of Capitalism and How It is Revolutionizing Our World. Mr. Gilder draws a brilliant insight from the way information like phone conversations, emails, and video is transmitted. The electromagnetic spectrum, he argues, is a completely predictable carrier, governed by speed of light. The information it carries, on the other hand, is highly unpredictable. It takes a low-entropy, no-surprises carrier to reliably transmit high-entropy, surprising content. If the carrier itself were to introduce a lot of noise into the signal, our communications would be a jumble.

These ideas from the fields of physics and information theory have extremely important implications for public policy in an age of accelerating technological transformation. In order for innovation to thrive, productivity to surge, and living standards to dramatically rise over the coming decades, we need “low-entropy” legal, regulatory, tax, and monetary policy, and stable institutions to implement it. Too much noisy interference from governments and central banks that distorts market incentives and increases the hassles of doing business can stifle innovation and discourage entrepreneurship. That’s why it is so critical for governments around the world to understand the technological transformation in progress and to actively pursue the reforms their economies will desperately need to participate in the new global economy.

That’s a worrying dynamic if we pay attention to the Heritage Foundation’s Stephen Moore, who harps on the distortions in public policy, or if we consider Hoisington Management’s Dr. Lacy Hunt, who explained to us today that, in aggregate and contrary to popular belief, total debt-to-GDP across the world’s major economies has INCREASED by nearly 35% in the years since 2008. And even more importantly, the new debt has been taken on disproportionately by the real problem economies: Japan, the Eurozone, and China.

With a powerful grasp of an enormous body of academic research (and armed with some hard-hitting discoveries of his own), Dr. Hunt warns that debt deflation – not inflation – is the biggest near-term risk. While inflationists like to chant Milton Friedman’s famous mantra “Inflation is always and everywhere a monetary phenomenon,” Lacy pulled back the curtain on Friedman’s lesser-known research and explained that the famous characterization of inflation ultimately depends on stable or rising monetary velocity… sans sufficient monetary velocity, inflation does not materialize. I really need to think through Dr. Hunt’s research to a greater extent and plan to spend a lot of time reviewing the conference recordings in the coming weeks. (You can do so, too, by ordering the SIC MP3/CD Audio Set at our discounted pre-event price. It’s available here.)

Dylan Grice largely concurred with Dr. Hunt. In his thoughtful outlook for a breakdown in international monetary cooperation, instigated by Japan’s dangerous move toward tit-for-tat central banking, Dylan warned that the world’s central banks are drifting into a dangerous prisoner’s dilemma.

In one of those wonderful moments that happen only at a conference of this quality, Dylan mentioned in conversation later in the day that a Minsky-like inflationary moment can absolutely happen if velocity (rather than interest rates) skyrockets. Paul McCulley had already claimed, in his lunchtime address, that major governments with control over their own printing presses do not have Minsky Moments, but he later had to concede that Dylan could be right in the event of a major policy error.

In the coming weeks, John and I are going to rest up a bit, then revisit the conference, dig into the research, reorganize and expand on our thoughts, and bring you some provocative new ideas.

Once again it is time to hit the send button. Ian Bremmer is walking us through his geopolitical outlook at the moment, and the crowd is hanging on every word. I don’t want to miss it!

Have a great day, and I’ll send you another recap tomorrow.

Worth Wray
Chief Strategist, Mauldin Companies

By Worth Wray

Good morning from 30,000 feet, somewhere over the great American West!

I admit to being a little overwhelmed as I write to you on my way home from the Strategic Investment Conference. After three days with two dozen of the finest investors, economists, and political scientists anywhere in the English-speaking world, it is going to take me weeks to think through the real-world implications of all I have learned.

While I will have to rely on my overloaded memory and late-night notes to reflect on the dozens of one-on-one conversations I had, I am so thankful to the folks at Mauldin Economics and Altegris for recording the sessions themselves, which will let me replay the experience over and over in the coming weeks. (You can do so, too, by ordering the SIC MP3/CD Audio Set at our discounted pre-event price. It’s available here.)

Much to my surprise, after two days of mind-blowing presentations and provocative conversations about debt overhangs, monetary policy, technological transformation, and the growing bubble in investor complacency, the conference ended on its strongest note yet!

Early in the day, GaveKal Research co-founder (and Europe’s preeminent financial journalist) Anatole Kaletsky shared a handful of variant perceptions that challenged my thinking and shattered my often self-deceptive sense of certainty. Contrary to the optimistic and technologically promising view of the future shared by John Mauldin, George Gilder, Newt Gingrich, and Jack Rivkin, Anatole suggested that the jury is still out on the future path of productivity growth. The still open question about productivity (which Anatole says may take 15 years to answer) has enormous implications not only for the climax and resolution of the global debt drama but also for the very structure of the global economy in the years ahead.

Looking to the shorter term, Anatole echoed a wise but too-often-overlooked comment from Gluskin Sheff Chief Economist & Strategist David Rosenberg on day 1 of the conference. Markets move as economic activity, liquidity conditions, and valuations get better or worse at the margin… and at the margin, Anatole suggests, the great and powerful headwinds on everyone’s minds may be slowly turning into tailwinds.

He laid out a powerful and actionable view of the future that I seriously need to consider in the coming weeks, starting with this question: Is the US stock market (an asset class that tends to dominate traditional investment portfolios) at the end of a five-year cyclical rebound and due for a correction…

… or are US stocks finally breaking out in a structural upswing after 14 years in a secular bear market purgatory?

While I remain concerned about the corrosive effects of dogmatic and irresponsible central bank policy – not to mention historically elevated valuations in the face of negative real interest rates – Anatole has learned to look past emotion and ask the uncomfortable questions. These are the moments when my brain goes into overdrive, and I feel absolutely alive.

What many people do not realize about Anatole is that he draws not only on the wisdom gained from a long career but also on an unparalleled personal network of legendary investors like George Soros, Stan Druckenmiller, and Kyle Bass… to name just a few.

The day ended with a lively debate, featuring an eye-opening range of competing views, that extended our conversation from questions about global markets and economies to geopolitics. While Harvard Professor Niall Ferguson expressed worries about the global dangers of US isolationism, the degeneration of American culture, and the troubling trajectory of government debt in the face of a dysfunctional political system, Eurasia Group President Ian Bremmer argued that US ambiguity is far more dangerous than isolationism.  Hamstrung by a lack of support from the American people to enforce hollow threats over “red lines” in Syria and the Ukraine, the Obama administration has not actually said what it wants in the world… leaving US allies and enemies to assume the worst (a point that Anatole shared with great vigor).

I wish I could outline their entire conversation for you – ranging from the future of the Eurozone and the rising risk of Russian imperialism to the enormous risks of Chinese reforms – but it is time to hit the send button.

I am leaving the Golden State with more questions than answers… but then again, that’s the mark of a great conference! Hope you can join us next year, and feel free to drop me a line anytime on Twitter at @WorthWray.

Worth Wray
Chief Strategist, Mauldin Companies