sl12 keynote - will economic growth return - final
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TRANSCRIPT
23rd AnnualInvestment Conference & Luncheon
Will Economic Growth Return in 2013?Cabot’s Top Three Investment Themes
Rob LuttsPresident & CIO
Cabot Money Management, Inc.216 Essex Street
Salem, Massachusetts 01970800-888-6468 eCabot.com
A Dynamic Global World
“We continue to be faced with a series of great opportunities brilliantly disguised as unsolvable problems.”
– John W. Gardner
OutlineI. Economics - Slowly Improving II. Governments – Status of Fiscal Crisis
Currency and Interest Rates – Temperature of patient Gold and Precious Metals
III. Corporate Conditions –Steady and Fairly Strong Why One Should Take Risk Today?
IV. Money Flows – Have Been Directed at Low Risk
V. Valuations – Attractive for Most Equities
VI. International Opportunities – Unusually Good Today
I. Global Economy: Deleveraging in Developed Economies
Three phases of the deleveraging process:
Business – largely completed
Consumers – now underway
Governments – just getting started
Emerging markets have room to increase borrowing
Strategies
Underweight developed markets sovereign bonds; diversify bonds
Invest in sector that may benefit from M&A, such as technology
Consider complementary strategies that may mitigate the impact of global financial market volatility stemming from the deleveraging process
Some complementary strategies may be available to pre-qualified investors only.Source: Wells Fargo Wealth Management, 7/12
U.S. economic data has been less positive in recent months,
creating a third soft patch in as many years.
$535 billion fiscal drag is a combination of expiring tax
cuts, automatic spending cuts, and tax increases.
The Eurozone economy contracted -0.4 percent in the second
quarter; we expect a mild recession in the Eurozone in 2012.
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
-5.3
-4.4
-2.3
1
2.2 2.2 2.2 2.4
1.71.3
0.700000000000001
0
-0.4-0.8
-0.3 -0.2
0.3
1
Eurozone GDP Growth Estimates
Source: Bloomberg Financial, LLP, Quarterly Consensus Estimates, 8/12
ShallowRecession
Expected in 2012
The U.S. economy has replaced about half of the jobs lost since the beginning of 2008 – more if open positions are considered.
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
9000000
10000000
Lost8,779,000
Gained4,345,000 Open
3,200,000
U.S. Replacing Lost Jobs
Total jobsgained and
open = 7,545,000 or 86% of lost jobs
Jobs
U.S
. Job
s
Source: FactSet, 8/12
II. Governments – Solutions To Sovereign Financial Crisis
Reform Financial Management of Government – This will take decades and will not likely have positive impact for many years. It is possible we will not really reform at all.
Inflate Economy To Create Growth – This is the path the Federal Reserve is taking. Today FED and other Global Central Bankers are creating money to give governments the ability to invest and create a new wave of growth. Problem: The cost is high – currency debasement leading to inflation. Not understood by average citizen.
Most Likely Outcome – A watered-down version of Reform that looks more like the same as the last few years. In this case we are confident gold goes higher and currency values decline further relative to real assets.
Governments – Solutions To Sovereign Financial Crisis
Quantitative Easing – A Fancy Term – For Running The Printing Presses
Governments – Federal Level - Benefit Most – from Low Interest Rates.
Do Governments Believe in Balanced Budgets? – NO – We (You and I) have allowed them to deficit spend. States and Local Government are not allowed this behavior.
There is an amazing Distributed Responsibility Factor – None of us individually are responsible – therefore we allow irresponsible fiscal behavior. You would not take on debt like this personally.
Governments – Far Too Important Today – They Control The Debt Pile
Currency Debasement – Has Been Carried out By Central Bankers Since Beginning of Time. Printing of money – more money chasing the same amount of goods and services. This eventually leads to inflation!
Roman Empire – Gold Coins, Silver Coins, Base Metals
Central Bankers – No central banker has ever had the opportunity to debase without doing so.
Government Strategy – Financial Repression
1. More Dollars Chasing The Same Goods – Classic Definition of Inflation
2. Fed - Bernanke has Chosen The Inflation Route – The Cost – Your Dollar’s Value is fading in value fast (UK, Europe are taking this path as well)
3. Debt Burden Large and Growing - $16 Trillion Official Debt– Value Destruction – Burden on Future Generations – A Debasement Factor ($2 trillion was added to this figure this year - unbelievable!)
4. Gold and Precious Metals – A Real Asset Impervious To Currency Debasement.
What is Currency Debasement?
At current deficit spending rates, U.S. Public Debt will exceed the debt ceiling limits in November.
Debasement is Not a New Strategy
1. To Understand Currency Debasement – Gold – Once and Future Money - Nathan Lewis (A history of central bankers over 2000 years – all have debased the currency) Empire of Debt – The Rise of an Epic Financial Crisis – Bill Bonner and Addison Wiggin
2. Real Asset Strategy – Precious Metals – Gold, Silver, Platinum, Diamonds, Land. Stocks – represents real assets – although it is difficult to manage profits in inflationary periods. Protect wealth with a health dose of these asset classes.
3. Gold – A Very Difficult Asset Class to Analyze – For a White Paper – see www.eCabot.com white paper section of web site or
www.gold.org World Gold Council web site. Hard Money, Shayne McGuire, 2010 Wiley (the single best gold book ever written).
What Can You Do To Protect Against Currency Debasement?
Allocation to Alternative Assets
1. Currency Protection – Gold and Gold mining Shares, Silver, Diamonds, Platinum other precious metals
2. International Bonds – High-quality sovereign bonds
3. Fixed Income Hybrids – High Yield, Preferred, Convertibles, Floating Rate Notes
4. Non-US Currency Securities – Yield plus protection from weaker dollar
5. Commodities – Energy, grains and other indexes
We Should Expect Inflation to Increase in Next 2-3 Years
Risks Today- bond market is in a very large bubble. It is larger than technology bubble of 1999!
10-Year Treasury Yield 1.8% - Not compensating you for interest rate risk or credit risk.
Manipulation of Interest Rates or Real Recession Fears? Both – Federal Reserve is buying about $20 Billion per week to keep interest rates low! QEIII just announced will add another $40 Billion per month of mortgage purchases.
We Believe The Fed Will Gets its Wish – Reflation Will be Successful. Side Effect -2-5 years will create higher levels of inflation
How Do You Achieve Respectable Yield Today?
Global Fixed-IncomeEEM DebtLocal Currency StrategiesForeign Corporate Bonds
` International Government Inflation-Protected BondsDomestic Fixed-Income
High Yield BondsShort-Intermediate Corporate DebtFloating Rate SecuritiesStep-up BondsUnrestrained Strategies (best relative value)
AlternativesFixed-Rate Preferred SecuritiesConvertible SecuritiesReal Estate Investment Trust Securities (REITs)
1. Central Bankers Debasement Activity – Printing $$$
2. Investment Demand is Accelerating – Three Phases of A Bull Market – We are now in Phase Two. Three is The Most Interesting and Most Profitable!
3. Wealth & Power Building in China and India – These Investors Love Gold
4. We Believe Institutions (Pension and Profit Sharing $) Are Just Discovering Gold – Evidence of This Just Beginning
Gold Bull Market - Primary Drivers:
What Happens If Institutional InvestorsStart To Buy Gold?
It would be like an elephant jumping into a bathtub!
1% of World Wealth - $1.3 Trillion. This equates to 20 Times the amount now invested
in GLD (ETF) or 20 Times Annual mine Production globally.
1. They Are Selling Jewelry – Ask A Local Jeweler
2. Public Is Buying Gold Coins and Bullion
3. How Does Cabot Buy Gold? – Gold Bullion (GLD), Gold Miners (GDX) and Gold Companies like Barrick Gold (ABX)
What Is Public Doing Today With Gold?
III. Corporate Conditions
Corporate Balance Sheets are Excellent – Best in Decades
Profitability Ratins – Very high – many reasons – driven by technology improvements – PRODUCTIVITY
Top Line – Revenue – Slowing consumer Income Growth Slow or non-existant
Corporate M&A is Strong – An Indication of value and strength in Corporate Board Rooms
Contrarily – Corporate Boards Today are very Conservative – keeping powder dry – lack of confidence among government policies. – This is holding back growth in normal recovery.
IV. Money Flows – Unprecedented
Four Years of Flows From Equities To Bonds
Institutional Allocations to Equities at 25-year lows – Approximately 42% of assets
Last Peak was 75% 13 years ago in 1999
We Expect These Flows To Reverse in Time
Ample liquidity remains available to support financial market growth as risk appetites improve.
Lots of “Dry Powder” on the Sidelines
Fuel for Next Bull Market - $1.2 Trillion on sidelines
Bonds are More Expensive Relative To Stocks than at any time in Last 60 years!
Where Are We Today?Long-term Perspective
Thirty Year Chart of Ten Year Treasury Yields
This Trend Will Eventually End
Thirty-Year Chart of Ten-Year Treasury Yields
This Trend Will Eventually End – When?
Where Are We Today?Short-term Perspective
Five-Year Chart of Ten-Year Treasury Yields
Double-DipFears Again Bottoming
Process
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V. Valuation – Not an Obstacle Today
Institutional Allocations to Equities at 25-year lows – Approximately 42% of assets
Last Equity Peak was 75% 13 years ago in 1999
Money FLOWS will reverse in time.
Retail and Institutional Investors Are Overexposed to bonds today – just as bull market in bonds is coming to an end.
Why Not Just Give Up on Stocks Until The Dust Clears and Economies Improve?
Four Solid Reasons: If you wait for clear signs of economic improvement – markets will
already be much higher – Stock market discounts 12-18 months ahead
Time is on your side: Once you have ten years of close to zero performance in broad-based equity indexes – Large opportunity is just ahead
Money flows are ultra bullish and monetary conditions are ultra bullish – Contrary indicators here are helpful
Classic Bullish Signs: Corporate Buybacks, Insider Buying by CEOs and Corp Officers are both at very high levels – These buyers usually know value better than most.
3 Reasons for Equities Now
Reason #1: Low 10-year Returns = High Expected Returns
-15%
-10%
-5%
0%
5%
10%
15%
20%
Dec
-19
Dec
-24
Dec
-29
Dec
-34
Dec
-39
Dec
-44
Dec
-49
Dec
-54
Dec
-59
Dec
-64
Dec
-69
Dec
-74
Dec
-79
Dec
-84
Dec
-89
Dec
-94
Dec
-99
Dec
-04
Dec
-09
DOW JONES INDUSTRIALS AVERAGE 10-YEAR ROLLING RETURNS
NOW!
15 Year Trading Range
16 Year Trading Range
S&P 500 Index 2007-2012 (Sept 11, 2012)
We Are Here Now!
International Opportunities Are Exceptional
Leading Companies in Emerging Markets – have double the profit margins of US Companies: Why?
Lower government infrastructure costs
Lower taxes
Lower healthcare expenses
Lower executive salaries
We expect Outperformance for Emerging Markets many years.
Volatility – Will Continue to Be High. Markets are Immature.
New Growth Engines in the Global Economy
Innovation will be crucial to global businesses as emerging countries add hundreds of millions to the global middle class
Global trade has helped to create 450 million jobs in the past 10 years
Attractive global corporations are headquartered all over the world
Strategies
Seek exposure to global consumer staples corporations
Invest in information technology; a “fuel for the global economy”
Upweight emerging market equities and debt
Source: Wells Fargo Wealth Management, 7/12
Middle class consumers are increasing at a rapid pace, especially in emerging economies, adding spending powerto the global markets.
1980 2009 2030 -
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
1,100,000,000
1,800,000,000
5,000,000,000
More Global Middle Class1 Consumers
Mid
dle
Cla
ss C
onsu
mer
Data Source: McKinsey Quarterly, 1/121 Defined as having daily per capita spending o f$10 to $100 in purchasing-power-parity terms
By some measures, emerging economies are set to surpass the developed economies in terms of total GDP.
The Purchasing Power Parity (PPP) exchange rate is defined as the amount of currency that would be needed to purchase the same basket of goods and services as one unit of the reference currency, usually the US dollar. Source: IMF, 4/2012
2000 2002 2004 2006 2008 2010 2012 2014 201630
35
40
45
50
55
60
65
70 Emerging Economies Overtaking Developed
Perc
ent
Share
of
Glo
bal G
DP
(P
PP
)
Emerging Economies 2017 54% e
DevelopedEconomies 2017 46% e
Equity dividend yields are attractive relative to cash and sovereign bond yields.
3-Mo LIBOR
10-Yr TSY U.S. MSCI AC World
China Germany U.K. Brazil Australia0
1
2
3
4
5
6
0.44
1.5
2.2
2.9
3.43.6
3.9
4.8 4.9
Key Yields
Yie
ld
Past Performance is no guarantee of future resultsData Source: FactSet, MSCI All Country World Index, 7/31/12.
Emerging Markets Superior Long Term Return
Ten Year Returns (Including Dividends) 8/31/2002 – 8/31/2012
S&P 500 6.4%
Emerging Market Index / MSCI 15.3%
India – Sensex Index 20.1%Brazil 18.5%Hong Kong Index 10.5%Shanghai Composite (China) 3.8%
Global Historical Price to EarningsGlobal equity valuations remain attractive.
Mumbai, India February 2012
Singapore May 2011
Tianjian, China November 2011
Mumbai India February 2012
India is one of the youngest populations on the planet with high savings rate and strong Government finances. India Sensex: +16% annual return over last ten years!
Beijing, China
Millions of Chinese and Indians are buying their first car – a modest small vehicle: $5,000
Cabot’s Top Three Themes:
I. Mobile Data and Cloud Computing:
Networks are changing everything. Internet arrived about 25 years ago. Email gained popularity in the late 1980s. An internet that links 100 million people is not worth 10 times one that links 10 million people. In fact, due to massive connective power, a network that links 100 million people is really worth much more than ten times the one that links 10 million. Most of the productivity benefits in the internet are in the future. We are expecting many great investment opportunities in this space.
Internet-Oriented Themes
Mobile Data – Wireless Proliferation
Cloud Computing
Software – Smart Phones, E- Readers, Migration to Digital
Search – Application Market, Medical Applications
Networks – Infrastructure
Unique Use of Internet
II. Productivity-Oriented Companies
Creating More Output with Same or fewer Resources
Software – Data Flow and Connectivity
Energy Efficiency – Alternative Energy
Robotics/ Advanced Materials – Lighter Weight
Advanced Electrical and Technology – iPhone
III. Global Emerging Middle Class: Primarily China, India and Brazil:
Capital Can Grow at Twice The Rate in Emerging Markets as USA and Europe
Retail & Healthcare Travel and Transportation (Auto) Banks Insurance & Education Internet & Advertising Infrastructure
To Succeed Today One Needs:
1. Flexible Thinking. Do not be afraid of change – Embrace it!
2. Use Risk Management Techniques
1. Size of positions
2. Loss discipline
3. Diversification strategy
3. “It Will Go Well” – “But It Will Not Be Relaxing!” Greg Esterbrook
IN SUMMARY
Longer term we are constructive and bullish, but shorter term we are somewhat more cautious
Government solutions and the new economic order will work in time. We will adapt and manage. Currencies will be depreciated.
Overall economic conditions will improve in time. Capitalism will not disappear – economic growth will again reassert itself.
Patience and a conservative strategy will be rewarded.
Thank you for the opportunity to share our ideas with you.
QUESTIONS
Thank you for joining us today.
23rd AnnualInvestment Conference & Luncheon