Friday, January 27, 2017

Sparks Fly at CFA Montreal Luncheon?

On Thursday François Trahan of Cornerstone Macro was in town for a CFA Montreal luncheon featuring a few panelists presenting their outlook 2017 (click on image):


Along with François were Stéfane Marion, Chief Economist and Strategist at the National Bank of Canada and Ari Van Assche, professor of business from HEC Montréal. Clément Gignac, Senior Vice-President and Chief Economist at Industrial Alliance Financial Group was the moderator and he did an excellent job.

Please note some of the presentations are available on the CFA Montreal website here. In particular, you can download Stéfane Marion's presentation here and Ari Van Assche's presentation here.

Unfortunately, François Trahan's presentation is not on the CFA Montreal website. I contacted François this morning by email to get it but he told me his compliance department said it's a no-go (why are compliance people so fussy on such trivial matters?!?).

Anyways, I'm a good internet researcher and can find pretty much anything online so we'll work around this annoying compliance issue. You should all go back a year to see François Trahan's 2016 outlook which can be found here.

A year ago, François was bullish, stating structural headwinds were going to collide with cyclical stimulus. But his views have changed "bigly" (to borrow one of Trump's favorite adjectives) and he's now on record being bearish for 2017.

Before I get into the luncheon, let me thank Andrea Wong of National, a public relations firm in based in Montreal. Her and her team once again did a wonderful job, just like the last event when the prince of Bridgewater was in town.

When I got to the conference center, it was jam-packed and I didn't know where to sit. I saw Andrea at the door and she directed me toward the back of the room where there was a chair in between two tables and I sat listening to all those dreadfully boring presentations.

Just kidding! I love François, Stéfane and Clément, know them well. François is a BCA Research alumnus like me and worked there before moving on to bigger and better gigs at Ned Davis, Brown Brother, ISI Group and now Cornerstone Macro. He's now a top Wall Street strategist and enjoys living in New York with his wife and kids but they still come to their farm outside Montreal from time to time.

Clément Gignac was my boss at the National Bank of Canada when he was the chief economist and strategist back in the bear market of 2000-2. Great guy, he is very nice and always knew how to butter me up when he wanted something, like writing a market comment for him: "Léo, t'as une bonne plume!" ("Leo, you write so well").  [Note: You can read Clément's current economic views at Industrial Alliance here.]

Stéfane Marion was my colleague back then. Great economist, really knows his stuff on the US, Canadian and global economy and is genuinely one of the nicest people I've met in the industry. I learned a lot working with him, Clément and Vincent Lépine who is now Vice-President, Global Economic Strategy, Global Asset Allocation and Currency Management at CIBC Asset Management.

Who else did I learn from back then? Martin Roberge who was then the chief quantitative strategist at the National Bank and is now Portfolio Strategist and Quantitative Analyst at Canaccord Genuity. I used to go into Martin's office and we would talk stocks, bonds and markets and just look at a bunch of charts.

Good times back then even if it was a long and painful bear market. The stock prop traders on the fifth floor who were partying it up like no tomorrow in 1999, living the high life on St-Laurent street, ended up hurting when the bear market hit and eventually they all lost their jobs.

Very few people remember the bear market of 2000-2002. It wasn't as bad as the one in 1973-1975 (so I was told by the seniors) but it was brutal, just brutal, especially for stock traders and investors.

I remember Clément rounded us up back then in his office and told us we needed to kick it into fifth gear because "in a bear market, clients love economists." And along with Martin Roberge, we were pulling in most of the soft dollars from clients and we all worked very hard producing great economic and market research and presented our ideas to clients on many road shows.

Why am I sharing all this with you? Because I believe we're headed back into another major bear market unlike anything we've experienced before but before it strikes in a "bigly" way, we might have some more irrational exuberance and Trumptimism to contend with.

Now, let's finally get into the CFA luncheon which ended up being a clash between Stéfane Marion, the cautious bull, and François Trahan, the somewhat uncomfortable bear.

Again, I like both these guys, know their strengths and weaknesses very well, so I refuse to take sides even if in my own Outlook 2017 on the reflation chimera, I referred to François's bearish call and pretty much outlined why I think we're headed into big trouble in the second half of the year. 

Please take the time to go over Stéfane Marion's presentation here. Stéfane was kind enough to share his main points with me earlier today via email (click on image):


The key point is the global economy is showing its best economic surprises in seven years and inflation is picking up everywhere including the US, which is why he believes the yield on the 10-year Treasury note could hit 3%. He also states even though Trump is unlikely to deliver massive fiscal stimulus, his moves to deregulate the economy could extend the expansion going on now.

However, he admitted that P/E expansion is very hard at this mature phase of the expansion but thinks P/E contraction will eventually come, but only after the curve flattens.

He prefers equities over bonds and thinks the biggest risk now s geopolitical. He states: "This cycle is most unusual for the U.S. as fiscal stimulus is being deployed with the unemployment rate below 5%. The last time this was attempted was in the 1960 (Kennedy-Johnson). The mature phase of the expansion was extended to 84 months back then (slide 28). Fiscal policy (including deregulation) will play a crucial role in this cycle."

François Trahan was the opposite of what he was last year, shifting from raging bull to a raging bear.  He admitted that economic surprises, especially in lagging or coincident indicators like inflation and employment can continue to surprise on the upside in the near term, but he said this sets up the bearish scenario of the Fed tightening as the global economy begins decelerating.

Here, I agree with François and have been voicing my concerns of a 2017 US dollar crisis where the greenback continues to surge higher bringing about the next financial crisis. More on this below.

François wasn't particularly impressed with Trump's massive fiscal stimulus and referred to a New York Times chart showing that if you look at historical episodes of massive fiscal stimulus, the effects on the economy were muted.

He made me laugh when he referred to his wife as a "North Eastern liberal" who credits President Obama with saving the US economy and basically stated it doesn't matter who is in the White House, the economy moves to its own rhythm (Amen! I get into email spats with my buddies out in California who are geniuses and yet they're "petrified" of Trump and think Obama was the best president ever...whatever!!).

Given his bearish stance, François favors bonds over stocks and he said he wouldn't be surprised if stocks slip 15-20% from these levels by year-end and if the yield on the 10-year Treasury note declines below 1.3%.  That's about as bearish as I've ever heard Mr. Trahan.

He had an interesting discussion on the behavior of P/Es saying they are acting more cyclically lately. "If the P/E was more correlated to inflation, we might change our scenario, but that just isn't the case."

In his presentation, Ari Van Assche discussed demographic changes in China and discussed structural changes going on there and what might happen in the future as growth slows and policies change. I must admit I didn't pay enough attention to Ari's presentation as I was chit chatting with my buddy at this point (my bad).

During the Q&A, François stated that sell-side economists and strategists are perennially optimistic, part of their occupational hazard. Stéfane responded by saying he is the chief economist but also sits on the bank's pension committee so he wears a sell-side and buy-side hat.

Anyways, enough of that, sparks didn't fly at the CFA luncheon but there was a civil disagreement. As you all know, I'm a deflationista, have NOT changed my mind as to where the global economy is headed and think too many smart people are making way too big a deal of a pickup in inflation in Germany, the US and elsewhere and they're reading way too much into it, erroneously believing it's  the beginning of the end for US bonds.

Where did I go wrong last year? I correctly ignored Soros's warning of another 2008 crisis and correctly predicted the bloodbath in stocks was ending in mid January, but I completely missed the reflation trade going in cyclicals like industrials and energy. I remember at one point I was trading and noticed the Metals and Mining (XME) ETF hit an intraday low of where it was back in the crisis of 2008 and I said to myself "hold your nose and just pounce!". I didn't and partially regretted it but my deflationary views remained in place and are still strong, so I don't care if I missed that rally. 

What surprised me yesterday is there wasn't a more serious discussion on the likelihood of a 2017 US dollar crisis where the greenback continues to surge higher and emerging markets get clobbered. This is my worst case scenario and I'm sticking with it and think there will be real fireworks in the fourth quarter of the year.

Stéfane did mention that commodity prices keep creeping up despite the stronger dollar, which has eased pressure on commodity exporting emerging markets but this won't likely last and when correlations get back to normal, a surging greenback will clobber Chinese (FXI), emerging markets (EEM), energy (XLE), Metals and Mining (XME), Oil & Gas Exploration (XOP) and all commodities (GSG) in general. 

I'm bearish like François but where I disagree with him is on the timing of his call. Remember what Keynes once said: "markets can stay irrational longer than you can stay solvent." There is a lot of money out there chasing risk assets higher, hedge funds leveraging up like crazy, animal spirits fueling excessive optimism, so this silliness can last a little longer.

Lastly, as Stéfane was leaving, I told him that Trump has signed more executive orders this week than Obama, Clinton and George "W" Bush did in their first month of office combined. I may be off a bit but President Trump isn't fooling around, working like a dog, perhaps fearful of the downturn that lies ahead.

As always, please remember to kindly donate or subscribe to this blog on the top right hand side under my picture using PayPal options. Every time I write a long comment like this one, I remind myself that I don't get paid for this and it's a lot of work which is grossly under-appreciated. Please show your financial support and kindly donate or subscribe to the blog.

Below, François Trahan defends his case for turning bearish. Listen carefully to his arguments and trust me, even though his timing is a bit early, I would definitely heed his warning.

I'll leave you with another thought. Soros lost a billion dollars last year following Trump's victory. Soros won't lose a billion dollars two years in a row.

And Steve Cohen just had his worst year since the financial crisis, up a mere 1% in 2016. That too is an anomaly. My money is that Soros and Cohen will kill their competition this year, including the quant hedge fund beast that helped elect Trump and killed it in terms of performance last year (more on top 2016 hedge fund performers in a subsequent comment). 

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