Our friend Glenn Cohen of Cohen Investment Strategies hosted a private webinar this week for accredited investors, where he and special guest Rick Campagna of 300 North Capital each shared their 2012 economic and financial market outlooks. Glenn was very kind to extend an invite my way, and especially kind to allow me to take notes so that I can share them with you here!
The webinar was great…these guys are both very thorough financial thinkers, and very plugged in with the hedge fund world. Rick’s fund has absolutely killed it over the last eighteen months, in fact, returning +30% before fees (and the returns are quite smooth, he rarely had a down month).
So with my freeloader webinar attendee pass and MacBook Air in hand, I cranked out these notes to share with you…
Notes from Presentation by Glenn Cohen, Founder and CEO, The Cohen Investment Plan
Glenn Cohen’s biggest concerns for the next two years are:
- The large deficits being run in developed countries – and the ways (or lack thereof) that we are dealing with them
- The S&P 500’s lagging performance vs. copper over the past two years
He points out that copper has led this cyclical bull market since early 2009 (see chart below). But as you can see, copper recently changed direction to the downside. So, Cohen is concerned that this is ushering in the beginning of a declining market trend.
Is Dr. Copper leading the S&P down? (Source: StockCharts.com)
The ECB’s Refusal to Kick the Can
It’s become clear that you cannot have a monetary union without a fiscal union, Cohen says, and the proposed solutions by EU leaders have caused more problems than they have solved. Germany no longer has the stomach to fund bailouts or targeted growth initiatives.
The ECB is unwilling to print money at this point – and this is the only short-term solution to sure up the footing of European economies. The EFSF is insufficient. And furthermore, GDP projections for 2012 may prove to be too optimistic, as current growth projections are positive for all periphery countries.
In summary, no outcome for Europe looks good.
China Housing Bubble Bursting
The Chinese housing bubble appears to be bursting, as the their top 15 cities saw housing tumble in October. And while China has strong long-term growth potential (thanks to strong demographics), it is certainly vulnerable to a sharp pullback in the near-term.
USA Not So Bad, Comparatively
Cohen likens the US to “the best house in a bad neighborhood” from a global economic perspective. But potential government gridlock on debt reduction strikes him as “very dangerous” – and it may cut a cyclical US recover short.
Summary of Cohen’s Outlook:
- Since March ‘09, we’ve experienced a cyclical bull market within the course of a larger bear market.
- The average bull market duration is 4.8 years during secular bull markets, but only 2.8 during secular bear markets; the current cyclical bull market is 33 months long.
- Given the current ominous setup, 2012-13 will likely be the worst years we’ve seen since 2008.
- There is now a potential for severe market declines punctuated by Fed driven QE market rallies…which would be followed by further declines.
- Therefore investors should place capital preservation at a premium.
Ed. note: More from Glenn Cohen: Beware These Headline Driven Markets
Glenn Cohen, Founder and CEO of Cohen Investment Strategies Inc. is a student of the financial markets and is extremely passionate about understanding how global risk, global macro economics, and fiscal and monetary policy can affect the prices of a variety of asset classes including equities, commodities, precious metals, and currencies.
As a result of his study, Mr. Cohen has created the proprietary Cohen Global Risk Index. The Cohen Global Risk Index uses all of the top tools that hedge funds use, the thinking of top financial minds, and over 350 data points to create a simple and practical risk index on a 1 to 5 scale. 1 indicates advancing markets and a fully invested portfolio while 5 warns of crisis and creates an asset protection plan.
Notes from Presentation by Rick Campagna, Lead Portfolion Manager, 300 North Capital
Rick Campagna sees significant headwinds that will dampen global economic activity. The developed economies are over-leveraged, and upcoming spending reductions will serve to reduce global growth.
Monetary policy has had a limited economic impact (more on this below).
In the larger context, stock markets appear to be in eleventh year of a 15-20 year secular bear market. So Campagna believes investors should stick with capital preservation and tactical asset allocation
Things are looking better in the near term – a narrow window of improving economic activity in the US has opened, Campagna believes. But he sees this upside cycle likely to be limited in both duration (3-9 months) and scope (1-3% GDP growth).
There are no shortage of outside factors that could derail this cyclical rally, though – the European sovereign debt crisis, to name one. Though he concedes that a “kick the can” solution may prolong the cycle’s upswing into early/mid 2012.
Debt throughout the developed world will be a perpetual overhand to growth, Campagna believes. Increased consumer and government debt drove growth over the past few decades, and that party is now over. US consumers are still highly levered, but these debt levels are (finally) starting to decline.
More Areas of Concern
- Campagna says excess US government deficits must reverse, as current deficit levels unsustainable.
- He thinks another 10% decline in the housing market is likely, as that would return to housing prices to trendline levels of “the old normal.”
- The periphery in Europe has serious structural economic issues – their labor costs are too high for them to be competitive.
- Interest rates on most of Europe’s sovereign debt are unsustainable – the debt levels are too high to support these levels of interest rates.
The QE Conundrum
Campagna says the reason QE3 has been jawboned not enacted is that QE2 was not effective. It pushed commodity prices up, which then slowed the economy -opposite the intended effect!
QE2 also signifcantly weakened the dollar, and he believes a strong dollar would be better for US growth (more on this below).
China’s Capex Binge Winding Down?
China’s current capex boom breaks all records in terms of duration and intensity, Campagna showed (via a graphical comparison with other historical examples such as Japan and Thailand).
Over the next five to ten years, he says at minimum they will need to steady this level of capex investment, and possibly shrink it.
A potential China slowdown is bad for commodities, of course, as they are the marginal buyers of many commodities (and regular readers know well that commodity prices are made at the margins).
Summary of Campagna’s Outlook:
- He expects high volatility moving forward.
- Possibly a slight cyclical uptick in the economy.
- Because hedge funds are under-invested (close to early 09 levels), and institituional investors are also highly under-invested, we have a possible setup for a near-term rally.
- Upside for US will be limited because Europe appears to be heading into recession.
- And if China rolls over too, entire global economy could likewise roll into recession next year.
- EFSF spread to bunds is rising – not a good sign for the bailout plan.
- Chinese spreads have also – quietly – elevated to heights from the last financial crisis.
- In the longer term, he sees gold as the winner – as an inflation hedge if central banks try to inflate their way out, or as crisis hedge if things get worse. Near term he believes it’s a bit overbought, and would look to buy more at a lower point, like near its 200-day moving average.
A Strong Dollar is Good for the US – Wait What?
I had to ask the question at the end of the presentation because I feared I misheard earlier. A strong dollar…good? That’s not what we’re taught by our mainstream Keynsian financial media!
Campagna explained that while a weak dollar may help exporters, it hurts consumers – and 70% of our economy is consumption.
A strong dollar puts more money in the pockets of consumers – he believes that if the dollar was stronger, gas prices would be lower, and food prices would be more under control.
This point is lost on our Federal Reserve, he quipped.
Well said Rick!
Rick Campagna is the lead portfolio manager for 300 North Capital’s long/short strategy and global macro strategy. He joined 300 North Capital, LLC in 2005 and has been in the investment industry since 1989.
To learn more about investing with Rick and his 300 North Capital fund, contact Glenn Cohen via email at Glenn@cohenwealth.com or direct by phone at (561) 799-1980.