George Schultze: Another 100-150 Bank Failures Next Year, Gold To $2,000 Oz.

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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