Perspectives from the BCA Conference and Review of September’s Markets


By Rob Edel, CFA

 

Highlights This Month

Read this month’s commentary in PDF format

 

The NWM Portfolio

Returns for the NWM Core Portfolio Fund increased 0.8% for the month of September.  The NWM Core Portfolio is managed using similar weights as our model portfolio and is comprised entirely of NWM Pooled Funds and Limited Partnerships. Actual client returns will vary depending on specific client situations and asset mixes.

Short term interest rates in both Canada and the U.S. eased slightly in September, causing the yield curve to steepen somewhat.  While interest rates were volatile, most of the performance generated during the month came from the continued narrowing of credit spreads.  The NWM Bond Fund was up 0.4% with strong performance from our all our managers.  In particular, Arrow Eastcoast was up 0.7%, and Sun Life Mid-Term Private Fixed Income Plus Fund was +0.5%.  Sun Life is a new manager for NWM Bond and we plan to continue increasing our allocation over the next several months.  In addition, we plan to also allocate funds to Sun Life’s new Short-Term Private Fixed Income Plus Fund, in which we are a seed investor along with six other institutional investors.

NWM High Yield Bond Fund returned +0.9% in September. While most of the fund generated small positive gains, alternative long/short credit fund Picton Mahoney Income Opportunities Fund produced a strong +3.3% return in September. No one has loved this bull-run as credit fundamentals have been deteriorating, but high yield participants feel the need to stay invested and keep up with the market. Within the low-to-negative interest rate backdrop, it is difficult to visualize any retreat of fixed income flows from U.S. high yield bonds. But it is important to appreciate NWM High Yield Bond’s illiquid nature and its susceptibility to episodic price volatility.

A weaker U.S. dollar and declining yields helped global bonds last month, with NWM Global Bond Fund up 0.1%.

NWM mortgage pools continued to deliver consistent returns, with NWM Primary Mortgage Fund and NWM Balanced Mortgage Fund returning +0.3 and +0.4% respectively in September.  Current yields, which are what the funds would return if all mortgages presently in the fund were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 2.9% for NWM Primary and 5.4% for NWM Balanced.  NWM Primary Mortgage ended the month with cash of $20.2 million, or 12.6%.  NWM Balanced Mortgage ended the month with $54.6 million in cash, or 12.2%.

NWM Preferred Share Fund was flat for the month of September returning -0.07% while the BMO Laddered Preferred Share Index ETF returned -0.17%. Although returns were muted for the month, underlying technicals look to be improving. The massive $1-billion TD deal was followed by a $500 million BNS deal and a $200-million Capital Power Corp deal during the month. All three deals have traded higher since launching with the TD issue trading as high as $25.81. New corporate issuances have come with a floor on minimum yields, providing protection if 5-year Bank of Canada yields drift lower.  The market was able to absorb the additional new issuance supply without a significant amount of volatility. In addition to better price stability, the quality of trading volume has improved. Both bank deals were welcomed with open arms from institutional buyers and the TD issue traded well over 4-million shares, close to a record.

Canadian equities were strong in September, with the S&P/TSX +1.2% (total return, including dividends), while NWM Canadian Equity Income Fund and NWM Canadian Tactical High Income Fund ($CAD) was up 1.9% and 1.0% respectively.  The energy sector was strong last month as crude oil rallied 16%.  In NWM Canadian Equity Income, we sold our positions in Waste Connections, Agrium, and KP Tissue as well as trimmed Ag Growth.  We used the proceeds to add to existing positions in SNC Lavelin, Stantec, CP, Hudson Bay, Industrial Alliance, CIBC, and Canadian Natural Resources.  We also established a new position in DH Corporation.  In NWM Canadian Tactical High Income, we were called away on our Bank of Nova Scotia position and we trimmed KP Tissue.

Foreign equities were moderately stronger in September with NWM Global Equity Fund up 0.4% compared to a 0.5% increase in the MSCI All World Index and a flat S&P 500 (all in Canadian dollar terms).  With the exception of Pier 21 Carnegie, which was down 0.3%, all our external managers produced positive returns.  BMO Asia Growth & Income was +1.1%, Lazard Global +1.0%, Edgepoint +0.8%, and Pier 21 Value Invest +0.2%.

NWM U.S. Equity Income Fund decreased 0.4% in U.S. dollar terms and NWM U.S. Tactical High Income fell 0.1% versus a flat S&P 500 (all in U.S. dollar terms).  In NWM U.S. Equity Income, we added to existing positions in Apple, Microsoft, Adobe, trimmed Wells Fargo, and sold our position in CBS.  As for NWM U.S. Tactical High Income, we were partially called away on Franklin Resources and Valero and added new short put positions in John Deere and Costco.

Real estate declined in September with NWM Real Estate Fund down 0.2%, versus the iShare REIT Index -0.5%.

NWM Alternative Strategies Fund was up 0.5% in September (these are estimates and can’t be confirmed until later in the month).  Of our Altegris feeder funds, Winton and Brevan Howard were down both down 0.3%, while Millenium and Citadel were up 1.0% and 2.1% respectively.  MAM Global Absolute Return Private Pool was down 1.1%, but RP Debt Opportunities was 0.5%, Polar North Pole Multi Strategy +0.7%, and RBC Multi-Strategy Trust +0.5%.

Precious metals gained back some of their losses from the previous month, with NWM Precious Metals Fund +2.7% and gold bullion up 0.6% in Canadian dollar terms.

Perspectives from the BCA Conference

We are voracious readers of all things financial: books, newspapers, analysts reports, you name it, we’ll read it.  Fortunately, technology has made access to information both timely and robust.  Occasionally, however, we like to go “old school” and get information right from the horse’s mouth.

A few months ago, we wrote about the Mauldin Strategic Investment Conference, which we attended in late May, and some of the informative but bearish presentations we attended.  In search of a more balanced view, we decided to check out the Bank Credit Analyst (BCA) conference in early September.  Like the Mauldin conference, the agenda was packed with a number of well-known speakers.  In addition, BCA added a healthy stable of their own highly respected analysts to the agenda that alone would have made the trip worthwhile.

Founded in 1949, BCA is an independent producer of global research and investment strategy to large institutional investors who are typically willing to pay large sums of money for access to their views.  Though originally Montreal based, BCA has a definite global bias and reach, which was evident with the attendees and presenters at the conference.  As with the Mauldin conference, we thought we would supplement this month’s market comments with observations from BCA and the other presenters at their conference.  We have added some graphics to help illustrate the issues, but know that these are not from the conference or any of the speaker’s presentations.

Going into the conference, one of the issues we were hoping to gain some insight on was why economic growth has been so low since the great recession.  The answer to this question is important given the impact growth has not only on corporate earnings, but also to the future direction of interest rates – which are at historical lows and appear in no hurry to move higher.  In order to help simplify the debate, we propose that there are four general theories for why growth has been disappointing and interest rates continued to trend lower:

1). There is too much debt and the world needs to deleverage.  By borrowing too much, consumers (as well as companies and governments) have borrowed from future growth and the resulting repayment of debt will result in slower growth in the future.  Carmen Reinhart and Kenneth Rogoff are most commonly associated with this theory, as detailed in their co-authored book on the subject: This Time is Different.

2). There is too little demand in the world.  Or put another way, there is an increasing propensity to save, which acts as a drag on economic growth. This theory is more popularly known as “secular stagnation” and holds that the imbalance between excessive savings and a decreased appetite for companies to invest, leads to lower interest rates as the supply of money exceeds demand.  The godfather of the secular stagnation theory is Harvard professor and former Treasury Secretary Lawrence Summers, who just happened to be a presenter at the BCA conference.

3). Declining supply, or low productivity.  This theory is also known as “supply-side secular stagnation.”  Absent population growth and increased productivity is the only way the economy can expand.  Productivity, however, has been largely absent during the economic recovery; some believe this is because large productivity gains derived from technology have played out and there are no new big innovations of a life-altering scale like there were between 1870 and 1970.  Robert Gordon, author of The Rise and Fall of American Growth is best known for this theory.

4). Savings glut. This theory shares some similarities with secular stagnation in claiming there is an imbalance between the supply and demand of money, but is more concerned with the excess supply of savings derived from emerging market countries, such as China, with large trade and current account surpluses than a lack of demand.  Oil-producing countries like Saudi Arabia would also be considered contributing to some of the glut.

We tend to fall into the deleveraging theory camp, but we acknowledge the unexplained question of why consumers accumulated so much debt in the first place.  Economic growth was slowing well before the financial crisis and consumers likely used debt as a means to maintain their standard of living.  Under this backdrop, secular stagnation is interesting in that it helps explain why growth has been slowing and interest rates are so low.  For this reason, Lawrence (Larry) Summers was, in our opinion, the keynote speaker at the conference and delivered a provocative argument for why interest rates are low, and why they are likely to remain so for some time to come.

Summers makes the point that if the slowdown were as Gordon argues due to supply constraining productivity issues, the result would be rising prices and inflation as wage increases would likely outpace the economy’s ability to produce goods and services.  The fact that inflation is so low indicates the problem is demand based, not supply.  In response to a question regarding the absence of productivity in today’s economy, Professor Summers postulated that productivity could be encountering a sort of J-curve effect as new technologies have consumed resources to develop, but have yet to deliver any productivity gains.  For example, autonomously driving cars have yet to lower employment (taxi drivers, truck drivers, driving your kids to soccer practice) but currently have a lot of people working on developing the technology.

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Without going into specifics, Summers believes there are a host of factors causing the decline in the consumer’s willingness to spend (income inequality, uncertainty of retirement income, uncertainty regarding technology, unwinding of the savings glut) but the result is the natural real rate of interest (which is the rate at which economic growth and inflation is stable) has been falling and is likely below zero in much of the developed world.

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Unlike many presenters at the conference, Summers doesn’t believe central bank monetary policy has been a mistake, but he doesn’t think it’s the solution either.  Because the U.S. Federal Reserve has consistently overestimated economic growth, they have had to continuously ratchet down their interest rate expectations, which Summers believes has hurt the Fed’s credibility.

The former Treasury Secretary believes fiscal policy is needed in order to help compensate for the lack of spending in the economy, and highlighted infrastructure spending as a solution.  When interest rates are low, more debt can be incurred without causing future financial distress.  Summers believes analysts haven’t adjusted to this new low interest rate paradigm where debt service levels are as important as absolute debt levels.  In other words, the guideline stating the upper threshold for government debt should be no more than 60% debt/GDP doesn’t make sense when interest rates are so low.

Countries have the room to borrow much more.  Summers suggest the same paradigm shift needs to take place for asset valuations.  For example, historical valuation benchmarks for equities don’t make sense given natural real interest rates of zero or lower. They should trade at much higher valuations.

Perhaps no other presenter at the BCA conference held a more opposite view from Larry Summers as Societe General’s global strategist Albert Edwards.  Commonly described as a perma-bear, Edwards’ beliefs are more in line with that of Reinhart and Rogoff in believing debt levels are the problem.  Edwards also believes central banks can’t prevent recessions, and unconventional monetary policy will only make the inevitable downturn worse.  He believes low rates are not only artificially pushing up valuations but are also leading to higher corporate debt levels, which Edwards believes will become a big problem in the next recession.

Unlike Larry Summers, Edwards believes fixed income investors look at more than just debt service.  In a recession, the market will start discounting companies’ ability to repay principal.  Once this happens, corporate credit spreads will begin to widen rapidly and painfully.

Gluskin Sheff’s David Rosenberg, who also presented at the Mauldin Conference, appeared on stage along-side Edwards.   Originally intended to play the bull to Edwards’ bearish views, Rosenberg appeared to find more common ground with Edwards than not.  Rosenberg also believes debt levels are too high and are hindering the economic recovery.  He doesn’t see the Fed moving interest rates meaningfully higher as he believes they want to create higher inflation.  While the unemployment rate might be indicating the U.S. is near full employment levels and inflation could be just around the corner, Rosenberg believes the participation rate is too low and there is still plenty of slack left in the labour market.

On the more positive side, Rosenberg doesn’t see a bear market on the horizon, or a recession, putting the odds over the next year at only 20%.  Lower corporate earnings could increase these odds and trigger a recession, while higher inflation would also be possible if fiscal policy works and closes the output gaps more than expected.

Longer term, both Rosenberg and Edwards believe debt monetization, where central banks effectively buy debt straight from the Treasury rather than the market, will eventually be the end game.  Another term for debt monetization is “helicopter money,” a term invented by economist Milton Freidman and re-used by former Federal Reserve Chairman Ben Bernanke, which refers to the ability of the central bank to effectively drop money out of helicopters in order to generate inflation.  It is figurative, of course, but is meant to describe a situation where government spending programs could be directly underwritten by central bank money printing.  For example, the government could agree to spend money on new infrastructure projects with funds supplied directly from a permanent increase in money supply.  With traditional quantitative easing, money supply is increased only if banks lend out the increased bank reserves they receive in exchange for the bonds the central bank purchases from them.  With helicopter money, banks are no longer part of the equation.

Helicopter money is very controversial.  The ultimate result is the loss of a central bank’s independence given they are now working hand in hand with the government and printing money to fund whatever expenditure the government wants.  If politicians are able to print money and spend without raising taxes, higher inflation would eventually be the result.

Desperate times require desperate measures and even the BCA analyst’s debate to logic of helicopter money.  Martin Barnes believes the overhang of too much debt, slow capital spending, and fiscal restraint are hindering economic growth and as such doesn’t see how more monetary policy can help.

Companies aren’t holding off making new investments because interest rates are too high.  Like Albert Edwards, Barnes believes low rates have brought future spending forward, and now the over consumption must be paid back through lower future growth.  He believes there is a lot that can be done to get growth higher, such as growth-friendly regulatory reforms.  Mr. Barnes doesn’t dismiss the idea helicopter money might be needed in the future, but doesn’t think it is necessary right now.

Taking the opposite side of the argument was Barnes’ colleague, Peter Berezin.  Berezin believes the Fed shouldn’t wait for a recession and that helicopter money should be used right now to help prevent a recession.  The BCA senior vice president pointed to the current low natural real interest rate to make the point central banks don’t have room to lower interest rates enough should the U.S. economy go back into recession.  He also argued deleveraging won’t happen if economic growth doesn’t pick up.  Debt/GDP ratio won’t decline if GDP growth is flat or declining.

While not claiming monetary policy as a cure for all that ails the economy, Berezin believes helicopter money can help facilitate other initiatives.  For example, it would be easier to implement structural reforms if the economy was operating at full employment, and helicopter spending could help achieve full employment.  Also, investment spending will increase if companies see the increased demand that a stronger economy would provide.  Though neither Barnes nor Berizen specifically said it, Berizen would appear to side with Larry Summers’ economic views more than Barnes’.

While BCA’s Peter Berizen was inclined to ramp up monetary policy, most presenters were very negative towards the Federal Reserve and believe they have been too slow in removing monetary stimulus and increasing interest rates.

Perhaps the most vocal was Kevin Warsh, a former Federal Reserve Governor himself who worked alongside Ben Bernanke at the Fed during the financial crisis.  Warsh is no perma-bear and he doesn’t agree with Larry Summers’ secular stagnation thesis.  He does, however, think the Fed are on the wrong track and is being run by people who think economic forecasting is a science using models developed in the late 1970’s.  He is embarrassed how myopic and data dependent the Fed has become, making decisions based on monthly payroll numbers that everyone knows are rough approximations.

Warsh believes the Fed has become too asset price dependent, afraid to raise rates because it could cause the capital markets to sell off.  In doing so, the Fed has effectively created a put option under equity prices.  Companies believe the Fed will always have their back and thus are more inclined to invest their capital in financial assets, like share buybacks, than capital investment which is less flexible and has more risk.

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As much as Larry Summers believes the economy would be in recession without monetary policy, Warsh believes monetary policy is actually holding economic growth back.  Former Fed Chairman Ben Bernanke was right to take the drastic measures he did during the financial crisis, but he didn’t pull back after the crisis had faded.  He thinks the current Governors, Janet Yellen included, have grown accustomed to the power and recognition they receive and haven’t allowed for the potential that they are wrong.  Instead, they have broken so many rules they are making up theories on why today’s unconventional monetary policies should.

Warsh made the point that the Federal Reserve of today gets its credibility from its predecessors, people like former Fed Chairman Paul Volker, who in the early 1980’s broke the back of inflation.  Volker made tough decisions that were very unpopular at the time.  According to Warsh, the current Fed leadership is letting Congress off the hook by not raising rates and forcing the government to use fiscal policy.  Warsh is very concerned that the Federal Reserve itself is at risk during the next recession.  Volker, coincidently, was also a presenter at the conference, and also expressed concerned with the decline in trust in the central bank.

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While we agree negative interest rates and helicopter money appear off track to us, we do think some commentators are being a little hard on the Fed.  In retrospect, there may have been a few windows of opportunities for them to raise rates, but an equally strong voice has been raised over the past several years that pre-mature tightening could tip the economy back into recession, as in 1937.   No Fed Chairman (or Chairwoman) wants to go down in history as the captain of the Titanic.  To Kevin Warsh’s point, they have gotten used to being painted by the press as the hero.

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Perhaps more to the point, if the U.S. is the only country raising interest rates, the U.S. dollar will soar, which is bad for American exports and economic growth, but also has negative geopolitical implications.

China roughly pegs the Yuan to the U.S. dollar.  If the dollar goes up, so does the Yuan.  With China attempting to rebalance its economy away from manufacturing and exports and towards a more consumer-based economy, a higher Yuan is the last thing they need.  Under this scenario, China would likely devalue, thus creating a currency war and more economic uncertainty.

Former Chairman Volker doesn’t like the Fed’s current dual mandate of maintaining price stability and full employment because he believes it’s too hard to balance the two and this creates uncertainty.  He believes the Fed should just worry about price and financial stability.  He doesn’t understand the concerns about low inflation.  Why is this such a bad thing?  Prices are generally stable so interest rates should be normalized.  We suspect the world has become a bit more complicated since Mr. Volker was running the Fed and financial stability is a much more elusive target in today’s interconnected world.

Yellen is in a tough spot.  Regardless, if monetary policy were a stock, its price could be described as having broken down through its 200-day moving average. More and more, the consensus view is that monetary policy is no longer effective, and might even be holding back economic growth.

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September In Review

This brings us to what was happening in the market last month.  Canadian equity markets were strong, with the S&P/TSX Index up 1.2% as oil rallied +16% to nearly $50 a barrel.  U.S. markets were virtually unchanged; however, as were 2- and 10-year bond yields.  Just because these markets were unchanged by month end, doesn’t mean they were unchanged during the month, however.

After going 43 trading days without a 1% move in either direction, market volatility returned with a vengeance on September 8 with the next three S&P 500 trading sessions seeing in excess of 1%, two down and one up.

Bond price volatility also increased, as yields spiked higher in mid-September before rallying into month end.  As of early October, bond yields have continued to move higher.  Also significant is the correlation between bond yields and stock prices have started to move back towards positive territory after turning negative in August and September.

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This is significant, because as we wrote last month, the negative correlation between bond yields and stock prices was unusual.  Stock typically does better when yields are rising. Higher bond yields are associated with a stronger economy, which is good for corporate earnings and stocks.

So is this what was happening last month and in early October?  Are yields moving higher because the economy is getting stronger?  We don’t think so.  As we will explain below, the economy is fine and there are no immediate concerns about a recession, but it has hardly shifted into a higher gear.

More likely, we believe the market is starting to discount the same belief as many of the speakers at the BCA conference, namely that monetary policy, and more specifically negative interest rates, are not effective and could actually be hurting economic growth.

Both the Bank of Japan and European Central Bank (ECB) have carefully guided expectations of additional monetary policy lower given the growing belief the undesirable impact of negative interest rates, particularly to financial institutions, outweigh any benefits. Also, it’s getting harder and harder to find government securities to buy.

As for the Federal Reserve, they would jump at the opportunity to raise rates.  After continuously guiding the market to expect rate increases over the past few years and only delivering one increase at the end of last year, the Fed is in desperate need of some credibility.  It might not be so good for equity markets, however.

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Equity markets, and asset prices in general, have been buoyed by the perception that interest rates would stay low with quantitative easing (QE), which was followed by QE 2 and 3, eventually morphing into QE 4-ever.  If this is not the case, and the Fed doesn’t have the markets back, then perhaps valuations and earnings growth will start to matter again.

Last month, we saw a rotation out of higher yielding sectors, like utilities and real estate, and into financials and technology, which typically out perform in a higher interest rate environment. However, smaller cap and higher beta stocks also outperformed, which would indicate investors were also rotating into sectors that have underperformed and might do well if the economy continues to recover.

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So how is the economy looking?  Manufacturing made a nice recovery last month, with most purchasing manager indices moving back into expansion territory.  Consumer confidence also moved higher in September, with the Conference Board’s indicator hitting nine-year highs, but retail sales were disappointing.

Job growth was ok – the U.S. has added new jobs for 70 straight months, but most of the big gains on the labour front look to be behind us.  The big debate is whether the participation rate can move higher.  If it can, there remains room for more job creation.  If not, wage inflation should start to kick in.  Median household incomes were up 5% in 2015, but are still 1.6% below 2007 levels.

Overall, GDP growth for the third quarter has again been guided lower by forecasters, with the Atlanta Fed’s GDPNow forecast indicating Q3 growth at 2.2% versus 3.7% of only a couple of months ago. So, economic growth still looks to be growing lower for longer.

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But low doesn’t necessarily mean a recession is around the corner.  The Federal Reserve’s model, for what it’s worth, only suggests there is a 12% chance the U.S. economy will go into recession over the next 12 months.  A recent WSJ poll of economists put the odds a little higher, at 20%, but believes there is a 60% chance of a recession occurring within the next 4 years.  A recent Deutsche Bank note from their top European equity strategist suggests all four of the warning signs that have predicted the past three recessions are flashing red.  Deutsche Bank believes there is only a 30% change of a recession, however, as they forecast U.S. earnings growth, which they believe to be a major predictor of recessions, will turn positive next year.

In 1986, the last time all four indicators incorrectly forecasted a recession, the economy continued to expand for another four years.  Higher wage growth could derail this thesis, however, and is one of the reasons the Fed is keeping a close eye on the job market, and inflation in general.

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Determining when the next recession will hit is crucial, because as many of the presenters at the BCA conference pointed out, there isn’t really much the world’s central banks could do right now if we get a global recession.  If monetary policy is played out, what options are left?  Fiscal policies, and infrastructure spending in particular, appear to be the consensus choice, not only by speakers at the BCA conference such as Larry Summers, but by governments around the world.

Both Hilary Clinton and Donald Trump have included infrastructure spending in their respective policy platforms for the November U.S. presidential election, and Japan recently unveiled a $73 billion package of infrastructure spending.  There has even been talk about tax cuts in Germany. Collectively, fiscal policy across developed world economies has turned positive for the first time since the end of the great recession. With populist parties pressuring incumbent parties around the world and central banks crying “no mas,” more spending and higher budget deficits appear on the horizon.

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But what about deleveraging you ask?  Wasn’t it one of the potential causes of the slow recovery we mentioned at the beginning of this commentary (I know, it feels like that was hours ago)?  Yes, and it will be interesting to see how much fiscal spending governments will be able to implement, and even more interesting to see what they end up spending it on.

Politicians don’t have a good track record for wisely investing taxpayer money.  Not since the Truman administration has a new President come into office with a higher debt/GDP ratio.  The U.S. still has an entitlement spending issue, and everyone one in Washington knows it.  Greg Valliere, Chief Political Strategist for Horizon Investments, spoke at the BCA conference, and while the main focus of his talk was the various issues surrounding the upcoming U.S. election, it was what was not being talked about by either candidate that disturbed him the most.  Mr. Valliere highlighted entitlement spending as one of three big issues that he felt were important, but were not being addressed.

Ok, so let’s bring it full circle (and we concede the circle has been fairly wide).  Why has the economic recovery been so disappointing, and what does this mean for investment returns?

While we agree with some aspects of Larry Summers’ secular stagnation argument, we have a hard time buying into his solution of increasing government spending in order to supplement stagnant demand.  We suspect Mr. Summers is correct in highlighting factors and imbalances that began impacting the economy long before the financial crisis.  Be it the introduction of China’s 1.25 billion strong and cheap labour force to world markets, the disruption caused by technology and globalization, or demographics and the aging of the baby boomers, all have helped slow wage growth, dampen economic growth, and created a savings glut that has helped push interest rates lower and lower.

Debt and leverage helped mask the problem for a period of time, but eventually wasn’t able to keep up and gave way to the financial crisis.   This doesn’t mean deleveraging isn’t important, it is.  It still must be unwound, but so do the other imbalances.  It will take time, however.  There are no quick solutions, and plenty of opportunities for politicians to make grave policy mistakes.

Trade barriers and protectionist policies are, in our opinion, a grave mistake.  Negative interest rates are also a blunder but fiscal spending and large deficits are equally disturbing.  What it also means, however, is interest rates are likely to stay low for longer than we would have ever imagined.  Here we agree with Mr. Summers.  The Fed will increase rates in December, but any thoughts that this will be the start of a trend are misplaced.  Bond yields will move higher and the yield curve should steepen, but not by much.  They can’t.   If they do, it’s because of a policy mistake, namely too much monetary stimulus or out of control fiscal policy. What happens if there is a recession or if central banks and governments are guilty of making some significant policy mistakes?  Well, as Harry Markowitz once remarked, diversification is the only free lunch in investing, and we like free.  That, and a little gold.

What did you think of September’s economic activity?  Let us know in the comments below!

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. NWM Fund returns are quoted net of fund level fees and expenses but before NWM portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value.