In Case You Missed It – Around the World with Yusko
Mark Yusko, CEO and CIO of Morgan Creek Capital Management, LLC and Portfolio Manager of the AdvisorShares Morgan Creek Global Tactical ETF (NYSE Arca: GTAA) began his September webinar an hour before Federal Reserve Chair Janet Yellen was set to address the media.
“QEen Janet or Lucy? Will the Real Ms. Yellen Please Stand Up?”
September 17, 2015
Prefacing the discussion of the current market environment, Mark calls to mind the fears of late 2013, as Ben Bernanke prepared to hand over the reins of the central bank. Would Yellen continue the Quantitative Easing initiated by her predecessor, or would her inner Lucy van Pelt pull the ball away? Of course, QE3 followed, and the Peanuts gallery was silenced. As speculation abounds regarding the Fed’s decision to hike or not to hike, Yusko highlights quotations from the Chair regarding the environment she would need to see before any tightening occurs.
Differentiating the reasons behind the lingering low interest rates, Yusko points to liquidity provided to banks by QE (a strategy which has significantly increased the Federal Reserve’s balance sheet) as well as the desire to support a government attempting to navigate large amounts of debt. He suggests the possibility that Yellen’s real interests lay in the stock market. He describes how low rates lead to increased multiples, leverage, and stock buy backs, which drive up earnings per share (though not actual earnings), and end with ever desirable higher stock prices. Shifting from reasons to ramifications of QE, all roads lead to an increase in the Federal Reserve’s balance sheet by trillions, prodding Yusko’s ever potent articulation of the capital “T” in trillion (spending a dollar every second for 31,710 years would only cost you one trillion).
In January’s Around the World with Yusko webinar, one of the highlighted surprises for 2015 was that the Fed Funds Rate would not increase by year end, rumors to the contrary notwithstanding. With promises of hikes dating back to 2009 still unfulfilled, Yusko believes that the currency market is calling the bluff and letting the dollar drift back down. In addition, Long Bonds are well within a long-term downward trend, signaling deflation as a greater threat than inflation. Raoul Pal’s GMI Crash Pattern (http://www.globalmacroinvestor.com/index.asp) offers some interesting predictions of these trends.
Minding the ticking clock toward Yellen’s announcement, Yusko proposes three objectives weighing in on the Federal Reserve’s decision. Employment, first on the list, is a “Mission Accomplished,” he says. With the unemployment rate now down toward 5%, this issue seems to be sitting pretty. However, Yusko notes that recessions begin at full employment, not end, so we may not be out of the woods yet. Other indicators, such as the JOLTS (Job Openings and Labor Turnover Survey) and Initial NFP (Non-Foreign Payrolls) are reaching record highs.
Inflation, on the other hand, is well short of goals. The proclaimed target of 2% is nowhere in sight, and charts show year-on-year headline inflation nearing the depths of the Great Recession. Citing metrics such as the U.S. Breakeven Inflation Rate, Yusko expresses his understanding of Chair Yellen’s resistance to raising rates, pointing out how the Federal Reserve’s inflation projections have overshot realized inflation consistently. Could the rumors be true? Is the hike a pump fake to go long for QE4?
With the first two objectives offsetting one another, Yusko presents a third, the Economic Environment, as a tiebreaker. But the game is over almost before it started. Relentless on the inadequacy of the Fed’s forecasting, Yusko describes how their GDP growth expectations are even more optimistic than their inflation expectations. The real GDP growth is not robust, and has been trending down for decades due to the “Killer Ds” – poor Demographics, overwhelming Debt, and Deflation. Low rates, he stresses, not only buoy stocks, but incentivize banks to borrow in order to purchase Treasuries, a “riskless transaction” which is leveraged to bolster bank earnings. “What [banks are] supposed to do,” says Yusko, “is lend to small and mid-sized enterprises, so they can create real jobs, not barista jobs.” Moving through a host of data including a Financial Conditions Index, Citi Economic Surprises Index, and PMI, he warns of the possibility of a looming (or even current) recession. Data on Global Trade follows the same downward trend. As China shifts away from Fixed Asset Investment (FAI) toward consumption, a beneficial move for their economy, the rest of the global economy suffers.
Circling back to port in his closing remarks, Yusko points once again to the stock market. With the second highest inflation-adjusted price levels in history and expectations soaring on one-year S&P500 returns, he suggests an alternative interpretation, citing John Burbank’s rule of thumb inversion ̶ “buy the dips” to “sell the rips” (@markyusko #followthevest) ̶ as a good example. Before closing, Yusko opens the floor to questions submitted through the webinar site, and is able to engage the audience’s interests on topics such as Emerging Market currencies, Hedge Fund Benchmarks, and Corporate debt, among others.
If you would like to participate in this month’s Around the World with Yusko webinar, “A.W. Jones was Right: Time to Get Hedged,” on Thursday, October 29, 2015 at 1:00pm EDT, please contact the Morgan Creek Capital, LLC Investor Relations team at IR@morgancreekcap.com.