11/19/2018 - The Roundtable Insight – David Rosenberg, Yra Harris & Peter Boockvar On The Economy, Markets & Investing Going Into 2019

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FRA Roundtable Interview: Nov 20th

By: Tenzin Lekphell


FRA: Hi! Welcome to FRA’s Roundtable Insight! … Today we have David Rosenberg, Yra Harris, and Peter Boockvar. David is Chief Economist and strategist at Gluskin Sheff. He has a focus on providing a top down perspective to the firm’s investment process and asset mix committee. Prior to joining Gluskin Sheff, David was Chief North American Economist at Merrill Lynch in New York for 7 years during which he was consistently ranked Institutional Investor All Star Analyst Rankings. Prior there too, he was Chief Economist and strategist for a Merrill Lynch Canada based out of Toronto. David is also the author of Breakfast with Dave and Espresso with Dave (publications of his economic and financial market insights). Yra is a hedge fund manager and global trader in foreign currencies, bonds, commodities, and equities for over 40 years. He was also CME director from 1997 to 2003. And Peter is Chief Investment Officer for the Bleakley Financial Group and Advisory. He has a newsletter product called BoockReport.com which has great macroeconomic insight and perspective with lots of updates on economic indicators.

Welcome gentlemen!

Peter: Thanks Rich!

David: Great to be here!

Yra: Thanks Richard! It’s a great pleasure to be here.

FRA: Great, awesome! I thought we’d begin and look at the Central Bank policy. David you recently feel that the Bank of Canada should pause on its interest rate hikes but the Fed reserve does not have to. Can you elaborate?

David: Well firstly, I think that the US economy for the time being is already, not just at full employment but at 3.7% unemployment, is already through full employment and the FED is below it’s own an estimate of neutral so I always felt comfortable with the view that in the United States and the fully employed stable price environment, you don’t have a 2% Fed funds rate, you have a 3% Fed funds rate. We’ll see if the Fed ends up getting there this cycle. There’s more skepticism on their view than there was just a few weeks ago. Look, the Bank of Canada, the level of capacity in the economy is far different. Canada is not nearly as late in the cycle as the US is point number 1. The Bank of Canada never stimulated the economy in Canada by expanding its balance sheet and never had a present balance sheet to provide stimulus. That’s point number 2. And we don’t have fiscal stimulus in Canada so that may change with next year’s budget but that’s a long ways off but the reality is that if you look at capacity levels, unemployment, fiscal stimulus, there’s far more reason for the Fed to be more hawkish than the Bank of Canada. And so that’s been my premise here that the Bank does not have to follow in the same footsteps as the US’s on those basis.

FRA: Yra do you feel likewise?

Yra: (inaudible 3:11-3:13) I think Canada is really well taken. It’s been one of those things that when you have to look at if the Canadian economy could really muster some continued growth. I mean it has to move back but they won’t have to overcome a balance sheet situation because I think they, well first off they weren’t in the same situation because of the banking laws and regulations in Canada and the dominance of the (inaudible 3:40-3:41) and the way they do their business so they didn’t have that situation but outside of that, yes I agree.

(inaudible 3:46- 3:48) a good point and I scratch my head for quite a while why the Canadian dollar hadn’t been stronger through this period? Yes I know that it’s tied heavily of course to the energy markets, some would say commodity markets. Canadian oil has blown a price of discount for quite a long time first of all because of the nature of a lot of it (inaudible 4:17-4:18). But I agree. I agree with that very much.

David: (inaudible 4:22-4:23) that Yra just said, the Canadian benchmark gold prices are down to $14. Now we know that every benchmark comes down but (inaudible 4:32) to say that if WTI got down to $14, we’d be talking about recessed in the US and the Fed easing policy. Well that’s where the Canadian benchmark is right now is $14. On top of that, household credit demand numbers in Canada have really slowed down remarkable. I mean maybe I’m old school but normally when you have decelerating credit demands, interest rates aren’t going up, they tend to go down. So, I think the Bank of Canada is offside if they continue to raise interest rates in this environment.

FRA: And your thoughts Peter?

Peter: Well I was gonna add to what David just said about that last point about Bank of Canada having to manage high debt levels of moderating housing market in certain markets and you know creating some sort of, I don’t want to say deleveraging because it’s not really deleveraging, it’s more of a slow credit growth type situation.

FRA: And let’s move to a discussion on trade challenges, given local and global trade challenges, what are the trends that you see on economic activity resulting? David your thoughts?

David: Well look, if your an investor right now, not just an investor but a business, you’re fighting a war here, I guess Jamie Dimon called it a squirmish, he was being polite but its truely multifaceted. For one thing, we’re all waiting with (inaudible 5:54) whether or not there’ll be some sort of agreement at the G20 summit at the end of the month and that’s an on again off again situation. But I was telling everybody that even if we managed to cobble together some sort of agreement with China, which I think is going to be very difficult when you think about what Xi Jinping actually put down in the constitution on what they can actually do to the appease the U.S. How this ends up, I just say that I don’t think there’s going to be some some big deal that causes a lot of euphoria and then we’re going to be left on January 21st where the tariffs on China are going to escalate dramatically from where they are right now. Remember that’s January 1st. That’s what’s hanging in the balance.

But let’s even assume that we have a trade agreement with China that reduces the pensions. Then the next phase is the trade war with the EU. The next phase is trade war with Japan and now all of a sudden, we got the House of Representatives, which are now controlled by the Democrats, who don’t seem as a group to thrilled about the USMCA and there’s no more for negotiating a new North American trade deal because Donald Trump signed that with the with the outgoing Mexican government and will not be able to cobble the same deal with the new Mexican government. So we can a situation where we’re back even if you assume that things with China go great, we’re back to uncertainty over NAFTA because if Trump doesn’t get this deal through with Congress, and I think that actually doesn’t get discussed but that’s gonna make the front pages for the next couple of months.Then we’re back to first principles with the President when he said, during the campaign and after, that his preference is to walk away from NAFTA. So that’s actually the dark (inaudible 7:46-7:47) that people aren’t talking about right now is that this North American deal is not a done deal at all.

FRA: Yra your thoughts? Do you agree?

Yra: You know there’s so many moving parts here that I can’t even disagree with. There are great many moving parts. But the overhang to this entire market of course is the fact of the global supply chain and we don’t know what the effect is going to be, about how much disruption is going to take place through all of this.There are so many unknowns and when they get to the G20, as long as we’re going down that road, (inaudible 8:22-8:24) come away with some type of positive outcome especially the Trump Administration is so attuned to the equity market that they’ve tied themselves to the mass of a positive equity market as being the velometer of their success. So they’re gonna have to figure out something (inaudible 8:47-8:48) equities market under (inaudible 8:50) you wait for (inaudible 8:53-854) Mnuchin to show up with some kind of statement, oh we’re doing this, we’re doing that.That’s kinda getting old. Unlike the last G20 meetings, I probably wouldn’t say last, 5,6,7,8 G20 meetings where they really accomplished nothing except maybe climate change and I’m not minimizing that as nothing. We can disagree about the science but the outcomes maybe we can’t get away from.They need something here and China, you know Peter and I were going back and forth this morning because Peter wrote a really good piece this morning and Pence’s speech, you know these people all have short memory. Pence says, we don’t load our friends up with debt. Oh really?! I studied American economic history for quite a while let alone American history and we do load our friends up on debt and in fact, we use to collect it like the Brits did with (inaudible 9:53) diplomacy. So the better go back and redo their analysis. Of course we did! Whether one is (inaudible 10:00) and the other is (inaudible 10:01) financed (inaudible 10:03).

So they have a long road to hold and they have to be careful because the Chinese have a different memories about the colonial nature of the western world and that come to play in this. So I’m not disagreeing with David. I agree with him and I think (inaudible 10:25 -10:26) harder to get to.

FRA: Just a quick question on that, Yra do you see challenges as being negative upon the US agricultural commodities market?

Yra: Well I think that they’ve explained that already and you and I,Richard, we talked about that long time ago. They couldn’t have time that worse for the agricultural sector because (inaudible 10:51-10:52) right when the Brazilian crop was being harvested, the Brazilian, Argentinian, South American crops were being harvested, and they’re offering discounts because there was so much product, so much Supply.

So the Chinese could afford to play this game and all it’s done is just like it did in the seventies with the Russian wheat deal, you start losing markets. More than the low prices in the short run, the farmers are really upset that markets are trying to build a route in diminished because of this tariff.

Yes, I always laugh when you put on tariffs and through the backdoor, you start offering subsidies to the businesses. You have to scratch you head. It’s a stupid policy, it was mis-timed, they came out with guns blazing because they wanted to make a point and the rural sectors of the United States economy held strong in supporting Trump. But you couldn’t have timed that worse. I would have waited until now but they were in a hurry because of the election cycle and the election cycles are more important than anything else. It’s a terrible, terrible policy in that regard.

FRA: And Peter your thoughts?

Peter: So I breakdown of the goals of the administration in 3 lanes.

1) One is economic ignorance and that’s their desire to lower trade deficits which is nonsense

2) Then its the technology threat by Chinese companies stealing. Well there are ways of dealing with that and right now the U.S government has essentially cut off a Chinese company that was accused of threatening technology for Micron. Not only is that company being cut off from doing business with American companies but they’re also getting tossed into some international courts. That’s the way of handle the theft of technology.

3) And then you have forced into joint ventures where you have to transfer technology. Well no one is forcing an American company to do a joint venture in China and if they do, then hand over their technology. US companies don’t have to agree to that. They voluntarily do it. I’m not saying that’s the right thing for China to be doing, to force the transfer of technology, but no one is forcing US companies to do business in China. They honestly want to do it for growth but its not being forced. So my point is that throwing tariffs to address these 3 things is like throwing a football at a catcher at a baseball game. It just doesn’t apply. The problem now is that your literally freezing global economic activity, (inaudible 13:49 the CEO and CFO of multinational business, you’ve clouded up all visibility, we’re seeing trade numbers from China, to Japan, to Germany, to the US all slowing across the board. So what’s happening is that the administration is taking for granted what was a decent economic start to the year and throwing it in the winds and hoping that t can somehow withstand these tariffs. The problem is, and I talk to and listen to alot of conference calls, 10% tariffs is not good and not fun but companies can handle it. You go to 25% and all bets are off! In terms of what Yra mentioned earlier about supply chains, well many companies that do business in China aren’t going to just pick up and go to Bangladesh, or Vietnam. They’re well entrenched there. They’re happy doing business in China (inaudible 14:41) products and their just going to have to eat this or their customers will eat this because when you throw tariffs to somebody else, it’s your own people that ends up paying for it.

FRA: Great insight! I guess the big question now is, given these trade challenges and transit economic activity, will there be a massive infrastructure fiscal stimulus? And if we can look at that question from the perspective of will there be a massive infrastructure fiscal stimulus in Canada, in the US, and in China where there has been a lot for the new silk route initiatives and also in Europe? As you mentioned Yra, the key to European infrastructure program will be the issuance of a Eurobond, which will begin the process of unifying the European financial markets. Maybe we begin with Yra your thoughts on that, for the massive infrastructure stimulus, will that happen? Yes or no in those jurisdictions?

Yra: When I listen to President Macron, he would like to get there yesterday and then when the Dutch Finance Minister came out today and said he was opposed to what Macron and Merkel had reached on the budget agreement, but that’s really not the issue.

(inaudible 16:02-16:03) George Soros and many others (inaudible 16:05-16:09) I can probably go back to (inaudible 16:11), and if you gonna do this, you needed a real Eurobond not individual sovereign bonds. (inaudible 16:19-16:25) including the French. The French never wanted to relinquish their sovereignty by surrendering their budget. (inaudible 16:33-16:36) but to give up your fiscal policy, that was a step beyond.

Now they realize that Soros and the others were right. You have to create a Eurobond. Now a good way, economically, (inaudible 16:51-16:52) Rahm Emanuel, the Mayor of Chicago, Chief of Staff to Obama would say, never let a crisis go wasted.

Well the Italians, I think are much more flexible in those demands, if they knew they were getting a massive infrastructure spending financed by the capital level (inaudible 17:20-17:21) in Europe and

you could do that! You could do this. You could do this at the G20 and say, hey, we need the infrastructure spending. Let’s do 500, it’s just a number, but what difference does a number mean anyways? They’ve already bought 3.5 trillion of debt that Dragi (inaudible 17:41-17:45).

But if you went a very long way to (inaudible 17:48-17:50) whatever it takes to sustain the Euro. Why go half way?

I think the infrastructure for Europe is easy and you get that Eurobond and to make it all a bigger joke, you have the ECB buy the debt anyways. So go to the German court or European Court of Justice but it would be a needed step that they need to undertake. Is it the best step? No. But they’ve already gone this deep so why stop now?

Which is really the (inaudible 18:31) and it will buy off (inaudible 18:32-18:40) you’ll get the optics of the Italians saying, ok, we’ll back off and everybody becomes a winner and you’ll do it with German money. What better way is that?!

FRA: David your thoughts on potential for massive infrastructure spending in Canada, US, China, and Europe?

David: Well, I’ll just give my thoughts quickly on Europe. The bottom line is that the only country that has the fiscal capacity to fund something like that will be Germany and their infrastructure is top-notch. It’s one of the best in the world so I really don’t know how that’s going to be facilitated.

I look to the US and infrastructure for election is just a classic motherhood. 14 letter word for motherhood, infrastructure, we hear it all the time. It gets people excited all the time. I remember we had an infrastructure package with Obama in 2010 and I don’t remember (inaudible 19:46-19:47), people will talk about how the money never really got spent although I continue to hear things were (inaudible 19:52) already. You can use Canada as a poster child. I mean there’s no plan to boost infrastructure in Canada. There’s other issues here that have to be addressed but the Trudeau government, who got elected at 2015, the first thing they did was embark on motherhood and infrastructure was part of their key campaign plank.

Canada has already started to see that money flow into the economy and at the same time, the Canadian economy is slowing down after never really doing a heck of a lot. I don’t see a infrastructure was a big antidote at what happened at the energy sector and now residential investment is gonna be going into a bear market because of its over capacity.

So I know that infrastructure makes for a nice headline, you know if you’re long on bonds in the United States, you really want to hear about how the federal government will fund infrastructure for the local governments. I’m not convinced that’s gonna happen but if it does happen, you have to remember that the (inaudible 20:52) period for infrastructure is in years.

This is no magic bullet. I’m not gonna say that we can’t use infrastructure to upgrade roads and highways. I’ve been hearing infrastructure for 30 years. We always need infrastructure but as a tool to boost the economy, it’s not very effective. As a tool, to say, upgrade the capital stock on a long term basis, I’m all for that. I’m not so sure given the level of acrimony between the House Democrats and the Administration, I’m not very hopeful we’re gonna get something done on that.

Even if they do, it’s not changing my overall investment philosophy which is extremely defensive at the moment.

FRA: And Peter your thoughts?

Peter: Public infrastructure spending it’s tough to get more inefficient than that and all you have to do is look at, I live in New Jersey, look at New York airports, the New Jersey transit system, the New York City subways, that’s not for lack of money, that’s for a complete waste of existing money and existing resources. So to think that okay we’re going to build some bridges and roads, well that’s being done all the time at the state level. So to see that we’re going to throw some more money at it and to think that’s gonna be efficient use of spend is complete nonsense.

Then it gets to the point where, okay let’s just say we passed something, we allocate money to these different jurisdiction, who’s gonna actually work on these roads? Where’s the skilled labour that’s gonna be tightening bolts on a bridge? I’m not sure if there are plentiful right now so I don’t even know if something was passed that anything would actually get done.

This laundry list of wasteful spending projects that has ended up costing billions and billions more than what was forecasted and for what?

So I would argue that the multiplier is less than 1 and yes overtime, you want a train system that works and you want a bridge that doesn’t collapse, I get that. But the multiplier is typically less than 1 when your dealing with public infrastructure spending.

FRA: Peter moving on to your forecast, what are your thoughts for the U.S Dollar and US interest rates for the next 6 to 12 months?

Peter: What the US dollar faces is a Fed that’s gonna either blink and pause, which is a growing possibility at the December meeting and I would argue that if they pause, they won’t have the either the guts or the data or the markets to end up hiking. Now granted that they can hike every meeting next year because everyone’s alive meeting. I’m more worried about European bonds and what the ECB has done and I do think that we’ve entered a longer term bear market in bonds generally but that could take awhile to play out.

With the dollar, the challenge the dollar then faces is if the Fed blinks, the dollar is going to be in trouble and interestingly the dollar has two different phases this year.

In the first half of the year, it was strong against emerging markets and traded actually relatively poorly against more developed currencies.

Then the second half, or at least the last couple of months, you’ve seen a rally in emerging market currencies and you’ve seen dollar strength against the Pound, the Euros more related to Italy. But I see these currency movements and the strength of the dollar is not because of something great is going on here, even thought someone could say rates are going up and the economy is better here than elsewhere, but a lot of it is I think shot in the foot type behaviour in overseas economies

But the second the Fed blinks the dollar’s gonna be in trouble, that could be the end of the dollar rally because the US government is still facing massive debts and deficits, which overtime is gonna be very dollar negative and just as the years go on, there’s gonna be less dollar transactions taking place. That’s a very long term story. I know it gets a lot of press now but I see lot of secular headwinds for the US dollar notwithstanding current (inaudible 25:08) against certain currencies.

FRA: And David your forecast for the US dollar, and US interest rate for the next 6 to 12 months?

David: Well I think that, well firstly on the US dollar, its been very tempting to be bullish on the US dollar because the FED, you know textbook economics, easy fiscal policy, tight monetary policy will always and everywhere, give you a bull market in your currency. But I think that story has largely played its course. I’m getting a little nervous over the bull market in the US dollar and I’ll tell you why. Firstly, the chart today looks absolutely ugly of the DXY but I’m looking at latest (inaudible 25:52) in the traders report and I’m looking that on the intercontinental exchange the trade weighted US dollar has a net speculative long position of over 40,000 contracts. I mean we haven’t seen this in about a year and a half. So there’s a huge overhang of speculative naked longs right now that could easily exit this over crowded trade and set the condition for this pretty big reversal in the US dollar going down as opposed to up.

I agree with Peter that the most important determinant in a currency is the relative interest rate differentials and one of the reasons why the US dollar is succumbing right now isn’t just that the naked longs are starting to exit the markets but the reason why and that’s because of the Fed, in a matter of about 6 weeks, has gone from hawkish, and I wouldn’t say dovish, but certainly less hawkish enough that you’ve had already just the matter of weeks of full wage hike priced in for next year come out of the marketplace.

We were supposedly at (inaudible 26:56-26:57) Oct 3rd, a long way from neutral, we may have to beyond neutral and now everyone’s talking about, no neutrals enough and by the way, maybe one or two rate hikes away. So that’s undercutting the US dollar at the current time.

(inaudible 27:13) interest rates, a lot could happen in a year. Probably at this stage, maybe less bearish on treasuries than Peter is, I think we may look back and say that when we approached the 3 and a quarter percent of the 10 year, maybe that was the peak and I think that there’s a lot of cross currents.
You have the cost push inflations forces from extremely tight labour market and from these tariffs but at the same time that’s battling the cyclicality of a decelerating global economy and US economy. So I think that we should just take our (inaudible 27:54) from the market itself. Here we have taken out a full rate cut for next year, here we got a lot of slowing growth, another turn down in the stock market and the best we can do is 3.05 on the 10 year note. You know the 10 year note in this mix of widening credit spread, deteriorating stock market, less bearish view or hawkish views on the Fed and the best you get is 20 basis points off the 10 year note.

I mean normally in the past when you had this sort of condition, especially in the stock market, the 10 year note yield was down 80 basis points not 20. So the market’s telling us something here and maybe it’s over beyond just talking about tariffs, cost push inflation, wages, the cost push inflation, but the fact that we’re really choking on supply. I mean Peter Boockvar comments all the time on what’s happening with these treasury options and the reality is that this time last year, the deficit was supposed to be $600 billion dollars this year. Well it’s gonna be worth more than a trillion dollars. So we were choking on treasuries supply that we weren’t supposed to get except the bright lights in Congress and the White House saw that cutting taxes at a time of full employment was a really great idea. Newton’s 3rd law of motion, every action has an equal opposite reaction is that bond yields are not falling when they should be falling and that ends up being another problem for the stock market because stock markets put in the lows. When you get to a certain relationship between the bond yield and the earnings yield on the stock market, the problem for the stock market and maybe for those people uber long treasuries is that you’re not getting a normal response here.

The reason is that there is too much supply. The streets left with too much product after these auctions and the dealers have to dump this product and this is putting (inaudible 29:42-29:43) on bond yields right now. To me that’s the big story. So I think we’re stuck in a range for the foreseeable future as far as the treasuries markets are concerned.

FRA: And Yra your views?

Yra: Well I’m gonna be very sympatico with this but let me pick up where Peter Boockvar was just talking about on CNBC, which is of course a huge amount of corporate investment debt to throw onto this and how much of it actually is LIBOR based which makes it even more telling. As we’ve talked about, Richard and Peter, and David a little bit, debt, debt, debt, is to financial markets is what location, location, location is to real estate. That’s the way I knew it, and I hold true to that and I think that David’s warnings are very, very important and Peter’s been there too cause we turned bearish a dollar i think at the same time at February of 2017 when we saw the move come, Peter and I. This movement of dollar, the dollar is going up grudgingly and I like David am old enough to know that when you have these interest rate differentials and with negative nominals, forget real, but nominals wage being negative in certain parts of the world, yet those currencies are not really weakening as they ought to and couple that with David’s comments about why aren’t these bonds a lot higher, that poses the question that United States is really drowning in debt and the world sees it. It’s like you hold your nose when you buy dollar assets today because there’s very little else to buy. You buy it cautiously and I think some of it is right because it’s to expensive right now to hedge it away. So a lot of people buy it and go, if I pay for the hedge, I’m basically breaking even so what’s the sense of doing that? So some people stay away from it. With David’s point is absolutely well taken on.I’m watching these curves. Right now, the 530 curve, which I call the speculative curve, is getting interesting because it’s moved while the 210 has kinda stayed stagnant. But I would say that’s because people have more duration matches that they have to put on. But as I tell people, if you buy a US bond of longer than 5 year duration, you need your head examined and ought to go looking for another profession because you’re an idiot. You’re an idiot! Unless you have duration that you have to cover because it makes zero sense cause as David talks about, this budget/ deficit this year is over a trillion. And this is, I’m not an anti-Trump, you know again, I’m from the school of Deng Xiaoping. I don’t care whether the cat is black or white, as long as the cat catches mice.

This is a president who’s never met a debt he doesn’t wanted to take on. So if he really gets into trouble, and that has been my point and that’s why I agree about the structural basis of infrastructure spending, this is somebody who’s looking to spend, spend, spend.

And If he finds sympatico voices from the Democratic party in the house, he will get his way cause he’s already said, he doesn’t care about debt. You know what, the freedom caucus, who was the voice of fiscal austerity and soundness and responsibility, their on their heels right now.

I would not buy a piece of US paper over 5 years. I think you’re out of your mind.

The equity market, that David points out, is telling you that because as we look at this board, (inaudible 33:52-33:55) 3.05? Really? That’s all you got after a 15% drop from the high to the recent low in the equity market.

That’s all you got? To me that’s a warning sign.

Peter: In the month of October, the stock market and bond market went down. Yields rose across the curve in October when equities fell as much as they did.

FRA: And finally lets look at what investors can do for investing or protecting themselves going into 2019. David, you’ve referenced 4 letters, Q.L.D.S, Quality, Liquidity, Defensiveness, and Selectiveness. Can you elaborate?

David: Sure. I think that when your talking about a step up in quality both across the capital structure, equity and debt. If your mandate is equity, I think you have to be very mindful of the degree of cyclicality that you have in your portfolio and focus on earnings visibility, and limit as much as you can your overall GDP sensitivity.

I think classically late cycle, I think we’re in the top of the 9th, and I think when we get to the top of the 9th, historically its the rare period where value outperforms growth and I think that will continue to be a theme, maybe a theme that works for relative terms and absolute terms but it will work in relative terms.

I think as Yra has said and Peter would agree that being very mindful of your duration in the fixed income portfolio is very important. Really until you see the (inaudible 35:44) eyes of the recession, which I think at some point will come next year, is like an odorless gas you know everybody likes to say that, oh I don’t see recession coming. Well most people don’t see recession coming when it’s already hit. So you want to be mindful of that up until a certain point when things start turning around (inaudible 36:03) keeping in mind that inflation is gonna be a problem but at the same time, a bit of a lagging indicator as we saw in 2008. So that’s the quality part. Liquidity, I think it’s pretty obvious, you want to have cash on hand for optionality or maybe more than that.(inaudible 36:24) at the beginning of the next cycle in other words, transitioning out of this long bull market. So you wanna use cash and look at this time last year, cash paid you 1%.Today cash, looking at the 4 year treasury bills are trading, you’re getting well over 2%. You’re getting better than they get in the debit and yield in the stock market. So you’re getting paid to be in cash today and I think that was a very prudent thing to do.

You wanna end up being, when all said and done, a lender in this market not a borrower.

You know LQDS, D for defensiveness, that goes back at the quality, basically perhaps, subsets that again be mindful. The OECD leading indicator is down 10 months in a row so you haven’t seen anything yet. This is a financial wedge. The global economy is gonna be weakening even more next year than it has from the previous year. So that means you have to be defensive and of course I would go back to fixed income markets especially in corporate when you can consider that next year is the first of the next 4 years for you’re gonna have a tsunami of debt refinancing in the corporate sector at a time where 50% of the investment grade universe is rated BBB. There’s gonna be a lot of volatility. Defensive also means very mindful in your fixed income portfolio and credit as to what the maturity schedule of the debt looks like and the companies that you own. Selectivity just means style investing, no different than late cycle value over growth. Late cycle means you wanna own as few stocks and few securities as possible. You wanna cull the portfolio. If early in the cycle, you own 60 stocks and mid cycle you own 40 stocks, you wanna have 20 late cycle. You wanna get down to your most blue chip, liquid, relatively safe names. So that’s what selectivity really means to really just have best idea portfolio and nothing else.

FRA: Peter your thoughts?

Peter: Yeah and to add to that, if you’re going to be in equities, at least for many listening possibly US and Canadian equities, boring is good. Boring businesses, peak valuations, not exciting that’s what people should be focus on. And I think in this downturn overseas, particularly Asian emerging markets that includes China, I think there’s a lot of value being created. The Chinese stock market has been as inefficient as it is. It’s been through a bear market down 60%, well now probably about 50 from its 07 peak let alone where it’s all from its 2015 high. And to add again, short duration, I’d be in gold and silver as part of my weak dollar belief next year when the Fed blinks. I think gold and silver are gonna be up a lot when that happens. I think it’s simple as that and having cash. There’s time to play offense and time to play defense. This is one of those times to play defense. There’s time to own gold and silver. There’s times not to own it. Now’s one of the times to own it.. So boring is good and I would stick to that.

FRA: And finally Yra?

Yra: There’s so much that I agree with here. The medals, I think they’ll have their day. People have been a little bit unnerved because of rising interest rates in the United states. You know its more than just rising interest rates cause we see 8% in Mexico and I would argue that Mexico is a probably a far better investment right now than a lot of other places. Yes I know that (inaudible 40:10) is coming on and there are some uncertainties of course that exist there but US is its own inconsistency. Part of it is who’s running this show. I don’t think we’ve had a high quality secretary of treasury probably since, and we can argue about that, the Rubin Summers years. I was not a Hank Paulson fan. I was certainly not a Jack Lew fan. I was certainly not a Tim Geithner fan. I’m less of a fan Mnuchin and yet all of this is taking place.

So when I buy a country’s sovereign bonds, I’m buying not only what their balance sheet looks like and what their financial statements, I’m also buying the credibility of the people in charge.

So again, you gotta be very careful here. I think that David and Peter are both making really great points about where yields have gotten to this in the face of all this and the inability of the dollar to really have a sizable rally cause David hit this right on the head.

I know I traded my way through Volcker and Reagan so we have the classic case of fiscal stimulus with tight monetary policy and the dollar boomed so the dollar strengthened till much of

the course they had to undo it through the (inaudible 41:36) accord.

We’ve got nothing out of this! Really, when you look at it, if you put up a long term chart or last year’s, okay, you know I can say the Euro was born 1,17,85 in January 1st 1999.

We’re not that far. We’re 1,14,50 and Europe is saddled with nothing but problems and still the dollar doesn’t rally. Now that doesn’t mean today it can’t rally, tomorrow it can’t rally, next week, but when you look at it’s overall performance, I would be very weary. There’s movement afoot here. There’s things underneath the surface, that are bubbling that you have to be attentive to and it’s what ought to be happening that isn’t happening and that should be a warning sign to everyone!

FRA: Great insight gentlemen! How can our listeners learn more about your work? David?

David: Well you could either call me directly at 416-681-8919 or email me at rosenberg@gluskinsheff.com and I’d be happy to get anybody on a trial for me two morning publications at Espresso With Dave and Breakfast With Dave and the best way to reach me once again either phone or email.

FRA: Great, and Peter?

Peter: You can reach me at peter.boockvar@bleakleyadvisory.com and I have a “C” after the double “Os” is my last name. For wealth management advice or macro market advice where you can go to the website boockreport.com.

FRA: Great, and Yra?

Yra: Just notesfromunderground or you can go to yraharris.com and register for there and if you write to notesfromunderground and it’s not low quality trolling but high quality, you’ll get an answer because a lot of people will respond to you tonight, give and take on the blog. Again, it’s not a tout sheet, we’re not a tout. We try to create ideas and you’ll do the work, we’ll just try to point you in a direction to see if there is any possible investment reward. To me is a great place for two way communication and for dialogue which so much in this business is. It’s about dialoguing with people who we respect and nothing does it better than this podcast that we’re sitting on right now.

FRA: Great! Thank you very much and we’ll end it there. Thank you very much gentlemen!

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.