Think commodities and emerging markets, and don’t expect even high single digit portfolio returns.
That was the grim message today at the Forum for Institutional Investors conference, where a panel of private equity managers talked macro economics.
Here are some highlights from our notes on the discussion.
ON WHERE THINGS ARE GOING
James Melcher, Founder and CIO, Balestra Capital:
- “We’re clearly in a deflationary environment” but government intervention sows the seeds of inflation.
- The outlook is “very grim.”
- Most evaluations of the market are way too high.
- On the financial crisis: “There’s nothing unusual about it. It happens every 10 or 20 years in our system. It always has, and I think we’re seeing another bubble right now.”
- So called “green shoots” will turn out to be just weeds.
Don Hanna, Managing Director, Global Liquid Markets Research, Fortress Investment Group:
- The worst in terms of asset prices is behind us.
- But we’re not going to see a robust recovery.
- The problem is the country has made problems about insuring an ageing population that we couldn’t afford 10 years ago, much less now.
- The only good news for the dollar is we’re not the only ones who have that problem.
George Schultze, Managing Member and Portfolio Manager, Schultze Asset Management:
- “We’re about half-way through.”
- Systemic risk has been put on the sideline for now.
- “There probably won’t be another huge, unexpected blow-up like Lehman Brothers.”
- There will be more big bankruptcies — “I expect CIT will file.”
- There will be another 100 or 150 assisted bank take-overs next year.
- “It’s near certain we’ll have inflation going forward.”
- The leverage bubble has shifted from consumers and companies to the government.
Mitch Kuflik, Principal, Brahman Capital Corp.:
- “The market is pricing in a very bearish outlook.”
- It’s interesting to think about if the debt has already been priced in.
ON WHERE TO INVEST
James Melcher, Balestra:
- Gold may be the best investment today — it’s important to hold it as an insurance policy
- All currencies “look terrible,” making gold look all the better — it’s good in both inflationary and deflationary periods
- Commodities work long term, but are volatile in the short term
- An overall portfolio return rate of 7.75 per cent is “optimistic.”
- It’s going to be a very difficult time, and one of enormous volatility.
- Focus on “very long term” investing in specific areas, like emerging markets and commodities over 10 to 20 years.
- Broad diversification won’t work — will lead to where it did recently.
George Schultze, Schultze:
- Look at gold — it’s probably going to $2,000 an ounce.
- Commodities are really rallying — oil, sugar, corn.
- The dollar will depreciate, it’s just a question of when. So don’t hold many dollars. It’s a good time to borrow money — you can pay back with the depreciated currency.
- Because of the weak dollar, it’s also a good time to stay fully invested. Because of that it’s wise to invest in companies that export from the U.S.
- Invest in distressed securities — there’s some wonderful arbitrage out there.
Don Hanna, Fortress:
- Big winners of last few years are emerging markets.
- But they may only be good in the short term as governments become more interventionist.
Mitch Kuflik, Brahman:
- Focus on the fundamentals of individual companies.
- Need a “deeper, more intense focus on quality of business.”
- Invest in great management and free cash flow.
Want to get into gold? Here are 11 ways.
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