Reading the Tea Leaves: Where Are Markets Headed? (updated)

Panel Composition & Context

• Panelists: Chris Ailman (CalSTRS CIO, moderator), Ann Cassells (Atos Alternative Investments CEO), John Rogers (Ariel Capital Founder/CEO), John Calamos (Calamos Investments CEO), George Evans (Oppenheimer CIO), Todd Morley (G2 Investments Chairman/CEO).
• Moderator Ailman noted a past error by his panel (predicting Greece's exit from the Euro) where taking the opposite stance would have doubled money.

US Economic Outlook: New Normal vs. Old Normal

• Ann Cassells (New Normal): Argues the US is transitioning to a 2% growth environment driven by demographics (population growth down to 0.5%) and productivity, contrasting with the past 3% growth.
  • Believes Europe is in a 0% growth environment due to severe demographic and structural issues.
  • Views the current 10-year period as a "beautiful deleveraging" (citing Ray Dalio).
• John Rogers (Old Normal): Predicts US growth will exceed 2%, potentially exceeding 4%, as pent-up demand for housing and population growth returns.
  • Cites housing recovery, lower energy prices (re-shoring manufacturing), and low interest rates as key drivers.
  • Observes a massive rotation of capital from "de-risked" cash/hedge funds back into traditional equities.
  • Believes unemployment will fall back below 5%.

Interest Rates, Inflation, and Quantitative Easing (QE)

• John Rogers: Believes a rise in rates is not inherently bad if it encourages banks to lend to small businesses (the primary job creators).
  • Suggests 2-3% inflation is a healthy, manageable outcome compared to deflation risks.
  • Warns of long-term risks like bioterrorism or nuclear escalation impacting the economy.
• Todd Morley: Characterizes the current market as a "zombie market" propped up by Fed steroids (QE), arguing that equity and bond valuations are unsustainable without stimulus.
  • Predicts a violent, unexpected reflationary event driven by the need to devalue sovereign liabilities (US and Eurozone).
  • Foresees a rotation from paper assets (cash/currencies) into hard assets (oil, gas, copper, iron ore, food).
• George Evans: Notes that while developed world growth is slow, it masks significant opportunities in "mass affluence" in emerging markets.
  • Highlights the doubling of global information generation and the shift to the "Internet of Things" as a 5-10 year growth theme.
  • Warns against complacency in Japan due to endemic capital misallocation (only ~15% of top 200 firms consistently beat WACC).

Investment Strategies & Asset Allocation

• Todd Morley: Focuses on "Omega moments" (forced liquidations) and buying distressed but performing assets (e.g., senior secured loans at 65 cents on the dollar).
  • Critiques 401(k) structures for lacking access to hard assets or non-correlated alternatives, advising a behavioral approach over standard asset allocation.
• John Calamos: Advocates for "quality growth" stocks with consistent earnings, noting that while P/E ratios are low, valuation discipline remains critical.
  • Identifies a "two-tier market": yield-seeking stocks perform well, while undervalued growth stocks (tech) lag but offer future P/E expansion.
• Ann Cassells: Recommends high-quality consumer franchises selling to global emerging markets (e.g., Diageo) as a long-term hold.
  • For fixed income, suggests enhanced strategies like mid-market lending to seek 6-8% yields, as traditional bond yields are historically low (approx. 1.7% on aggregate index).

Forward-Looking Statements (2015-2016 Projections)

• Inflation & Rates: Cassells projects 2016 inflation at 2-3%, with the 10-year Treasury yielding 4.5-5.5% as the Fed allows QE to unwind naturally.
• Equity Valuations: Rogers believes P/E multiples can expand further if growth surprises to the upside; Morley warns of a potential collapse in asset prices if inflation spikes violently.
• Fed Policy: Anticipates Bernanke's departure in 2014, with unwinding of QE likely in 2015 via portfolio runoff rather than active selling.
• Market Structure: Predictions suggest a bifurcation in markets where specific companies succeed despite slow GDP, while cyclical recovery stories lose probability.

Specific Trade Recommendations

• Longs:
  • John Rogers: KKR (Private Equity) and global consumer brands with emerging market revenue exposure.
  • Todd Morley: Natural resources (oil, gas, copper).
  • George Evans: Global consumer franchises (e.g., Diageo).
  • Ann Cassells: Mid-market lending.
• Shorts:
  • John Rogers: Long-dated government bonds (risk of rapid rate spikes).
  • Todd Morley: Paper assets/currencies.
  • John Calamos: Conservative consumer staples with stretched valuations (e.g., Clorox).
  • Ann Cassells: French sovereign credit (via CDS) or industries facing structural decline (like traditional media).