January 14, 2020
Senior Vice President, Private Wealth Group, CMG
- Segment 1 (03:35): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG
- Segment 2 (19:30): Interview with CMG Mauldin Smart Core ETF Strategist, Michael Hee, Managing Director of Investment Research, CMG
Brian Schreiner: Hello. Welcome to the Quarterly Conference Call for the CMG Mauldin Smart Core investment strategy. My name is Brian Schreiner. I’m senior vice president of the Private Wealth Group here at CMG.
The Mauldin Smart Core investment strategy is the culmination of over 30 years of economic thinking by one of the world’s leading economic writers. John is the chief economist and co-portfolio manager of the CMG Mauldin Smart Core investment strategy. He believes that the end of the debt super-cycle is one of the most profound trends that will impact your portfolio over the next several years, and he believes that the period ahead will require you to think and invest differently to get through “The Great Reset.”
Instead of diversifying asset classes, Mauldin Smart Core diversifies among trading strategies. These strategies seek growth, have the ability to respond to the global economy on a daily basis, and do so with a disciplined investment process that seeks to minimize downside risk.
Think of Smart Core as four strategies in one managed account portfolio. The strategies utilize ETFs that enable them to trade across asset classes, countries, sectors, commodities, and cash-like securities for safety.
Today’s call is going to be split into two segments. First, we’ll hear from Co-Portfolio Manager John Mauldin on what he sees as today’s investment environment and the economic landscape. In the second segment, we’ll hear from one of the portfolio’s asset managers, Michael Hee, Managing Director of Investment Research here at CMG. Mike will give us an in-depth view of one of the individual trading strategies within Mauldin Smart Core.
As you’re listening to the call today, if you have any questions or you want to learn more about our investment strategies and services, please contact us by phone or email. Our phone number is (800) 891-9092 and our email address is firstname.lastname@example.org.
Federal securities laws require us to make the following disclosure: Investing involves risk. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including CMG Mauldin Smart Core) will be profitable, be suitable for your portfolio or individual situation, or prove successful. No portion of this call should be construed as an offer or solicitation for the purchase or sale of any security. There are additional important disclosures in our Form ADV, which is available on our website.
Now, it’s always a pleasure to introduce my friend and colleague, John Mauldin, in addition to serving as Chief Economist here at CMG, John is a noted financial expert and New York Times bestselling author and pioneering online commentator and publisher of the weekly letter Thoughts from the Frontline with Mauldin Economics. He hosts the Strategic Investment Conference every year, which brings together some of the world’s most respected economist analysts and investment managers. John has written many books, several have appeared on the New York Times bestseller list including End Game, Code Red, Just One Thing and Bullseye Investing. Welcome, John. Thanks for joining us today.
John Mauldin: Good to be here Brian.
Brian Schreiner: Mauldin Smart Core is an opportunistic multi-asset multi-manager investment strategy that combined several investment strategies into one portfolio. The objective is to seek global growth opportunities while maintaining a level of protection in down markets. The Morningstar Category for US Fund Tactical Allocation was up 14.1% in 2019 while the Mauldin Smart Core managed account strategy was up 9.2%. John, are you pleased with how the strategy performed last year?
John Mauldin: Actually, I am given the unprecedented rise when literally everything worked to make over 9% in a strategy that is risk averse is actually quite good. I would take that in any year.
Brian Schreiner: Sure, and I’ll just add it and you can see this, if you look at our past conference calls and quarterly updates, the portfolio really was defensively positioned for most of the year, so we too are pretty pleased with performance. We’re not just comparing it to stocks the portfolio is globally diversified across asset classes.
John, reading your most recent Thoughts from the Frontline letters. They’ve been especially interesting because your review, your expectations for the coming decade in some detail. You titled the letter’s Decade of Living Dangerously, Part 1 and Decade of Living Dangerously, Part 2 and this is a continuation of your 2019 outlook letter. The Year of Living Dangerously. What’s your base case forecast for the economy this year and what do you see as the primary forces that will be at work in the economy in 2020?
John Mauldin: Well, my view for this year, my view for the decade are significantly different. This year my base case is that we have no recession. You know the few caveats, any outside shock, severe shock, something happening in Europe, something happening in China, that type of thing. A global recession starting, which I don’t see. I don’t see these things happening. They’re not my base case. The US should probably not have a recession. I would see a slower growth year. I mean a news came on the other day and said just Boeing itself will probably drop GDP a half percent. So there are some headwinds we have, but it’s a slow growth year, not a no-growth year. I think this is a slow growth with modest inflation and I’m putting air quotes around the word modest and it’s modest in the sense that that’s what the data that the Federal Reserve looks at. Now, I think the data that they look at is combined and put together in a flawed manner. I mean they don’t truly look at healthcare costs for instance. They look at how much Medicare and Medicaid have gone up and that’s their inflation for healthcare, which is not the healthcare prices that you and I have to deal with.
That being said, I think we’re coming to the point where it’s basically going to be a QE forever. Even if they tried to stop growing the balance sheet, I’ll think there will be almost a taper tantrum. Once again, there’ll be issues. I would expect some volatility in the stock market, which is going to mean that feds is going to want to lean into that, especially in the middle election year. And I think the volatility can be caused by the political polls because as they look at popular votes, the way they look at it are going to show Trump losing.
And while I don’t think he loses as if there’s no recession, it’s going to be a close election again, it’s very likely that he could lose the popular vote and still again win of the electoral votes. But the market is going to be concerned of an Elizabeth Warren or a Bernie Sanders-type, some progressive wins given all their rhetoric against businesses. The federal reserves painted itself into a corner now. The only choice they have is to do kind of pull Paul Volcker and say, we’re going to raise rates and try to get a handle on inflation and be willing to throw the country into recession. I just don’t see the fit doing that now. So we’re going to get QE and probably lower rates and when we get a recession, they’ll take it close to the zero bound at a minimum, if not to the zero bound.
I hope they don’t take it to the zero bound, I hope they go to 0.5. I mean, I’d like it to be left at one, but don’t go any further than 0.5. At least offer some way for banks to have some spread. Not that I feel sorry for banks, but banks are the circulatory system of the body and I don’t want to be cutting my blood veins and arteries just because I don’t particularly like them. Like I said, stock market valuations are stretched. Last year the growth was not an earnings, it was all in PD ratios. People were just simply prepared to pay higher evaluations for the same earnings.
So could that continue? Yes. Did we be more stretched? Yes. It’s kind of a mug’s game to try to predict short term movements in the stock market. There’s just not any good system. I’ve been looking at this for now over 30 years. Well over 30 years. I’m getting old Brian. There’s just no simple way to time the market. I’m worried that the corporate IUL debt has exploded. It’s continuing to explode. The irony is that even as we have more of this type of debt and junk bonds than we’ve ever had before, it keeps growing every month. Corporations keep issuing bonds at lower rates with no covenants and there’s an appetite out there for it and investors just seem to snap it up. Mutual funds, ETFs, pension funds, insurance companies. I think we have to go back and remember in the last financial crisis how your rates Rose 21.8% or what to that and which dropped the value of these IUL instruments significantly 30-40% we can see a greater loss in these and a rush to the exit and there’ll be nobody to buy except distress debt firms and they typically like to cherry pick the bottom so the funds are going to be an illiquid moment.
It’s going to be a very uncomfortable situation and that could be the trigger when it does happen. I don’t really think that happens until we get close to a recession. In one sense, from the truly 50,000 foot level, it doesn’t make any difference which party wins in November. The policy of tax and spend is going to be the same. The Democrats will tax a little bit more, but they’ll spend a little bit more. The Republicans are not going to cut any more taxes, I don’t think but they’re certainly been willing to spend more. There are no deputies at all. So we’re building up the debt. We’re growing the deficit. When we hit a recession, the deficit will hit 2.3 or 2.5 trillion dollars and I don’t think it backs down below 2 trillion for the rest of the decade without a significant tax increase, which will be an echo recession or I can say spending cut, but I say that only as I laugh because there is just simply no will to cut entitlement spending at all. But for this year, slow but steady growth in the one and a half to 2% range and volatility in the markets.
Brian Schreiner: In that letter, that I think you published on January 3rd or 4th and then this past – I think it was Friday or over the weekend – you published Part 2 of The Decade of Living Dangerously, you look beyond this year – beyond 2020 – and you talk about what you clearly see as the economic force that’s going to shape the decade and that’s debt. You point out that debt is growing faster than GDP and could reach 400 trillion by 2030, it’s about 250 trillion now and use Ben Hunt the long now concept to illustrate what has brought on the debt super cycle. How do you see the decade panning out and how should investors be thinking about their portfolios?
John Mauldin: Well, I’ve been trying to refine my thinking on what I mean by the great reset. I mean it doesn’t take a great leap of intuition to know that you just can’t keep piling on dead forever, there has to be an end and that end point I guess when we have to reset the debt, when we have to determine what asset values really are, when the market I clear, that’s what I think of as the reset. But that’s something that may take eight, nine, ten years. I mean it’s out there in the future, which is good for us because it allows us to position and take care of our own houses if you will. So in the meantime we’ll have a cycle of recessions and old business cycle recessions, periods of growth. I think there’ll be some investible trends that we’ll be able to take advantage of.
Ben Hunt talks about what he calls the long now and for him that’s everything we pull into the present from our future, from ourselves and from our grandchildren and he and I have talked about this and I think that’s one way to look at it. I see the long now cause I like that concept, that term. I see it a little bit differently in that, I think the next eight, nine, 10 years leading up to the great reset are going to be the long now investors are going to be blowed more into the concept of, ‘well, we can just keep going debt forever.’ It is not a problem. It’s been 80 years we’ve been growing debt and nothing’s happened and it’s the Minsky moment. Stability leads to instability, and the longer people think that we can grow that debt willy-nilly, the more they’re going to be inclined to say, this is normal and they’re going to invest – or the average person’s going to invest – assuming that that’s normal. It’s not.
I talk about $400 trillion of debt by the end of this decade. That’s on the book debts. That’s actual, “somebody borrowed that money” debt. Now, some of it may have come from quantitative reasoning. A great deal of it may have come from QE across many banks, central banks around the world, but nonetheless, somebody borrowed that money. That has nothing to do with unfunded liabilities, which is we in the US are healthcare. Medicare and social security, but Europe has its own version of unfunded liability, so does China, so does all the developed world. Most of the developed world, there’s some that don’t, but there are few and small and they don’t make that much difference in the grand scheme of things.
If you add in unfunded liabilities, it’s well north of $600 trillion by the end of this decade. Deficits are running huge everywhere and at some point central banks are monetizing so much money that I think it gets to the point where it breaks and we have to kind of reset what do we mean by debt and by reset that means we find different valuations so it’s not that the debt goes away because we have to remember the debt is a liability on one side but as an asset to somebody else. If you reduce the value of the liabilities, you’re reducing the value of the assets on somebody else’s books and that is problematic because now you’ve hit your insurance companies, you’ve hit your pension funds, you’ve hit savers, you’ve messed with currency valuations, and it’s not clear what that will look like when we talk about it today. Because we don’t know who’s going to be in political charge, because if you’re in political charge, you’re going to make sure that your side takes less of a hit than the other side and is it going to be in the middle class? Is it going to be the elite? How’s that going to work? And the answer is we just don’t know yet.
We just have to get closer to the event. But as we get closer, then we can make our adjustments as my friend Peter Boockvar is fond of saying, “We no longer have a business cycle. We have a credit cycle, a debt cycle, and this credit cycle is what’s driving everything.” I think there are lot of opportunities more in the tech space than in the traditional space, but I see a lot of opportunities that are going to flourish and will have value on the other side of the great reset. You go to any period of debt resettlement after it, there’s generally a boom and a growth because you now taken away that hindrance. Debt is a drag on growth. Well, once you remove that, you end up with a lot of growth and so I’m actually bullish on governments, if you will, because we’re the ones who really are accumulating the debt, but I’m bullish on humanity and the world. We’ll get through it. We’re just going to reset some valuations.
Brian Schreiner: Sure. It’s the idea of a creative destruction, right?
John Mauldin: Yes. Our opportunity is to make sure that whatever gets revalued, you know, our hope would be that we’d get some of the upward revaluations, but at the best, we want to make sure that we get assets to the other side that can begin to accumulate again in what I think as it going to be a great bull cycle.
Brian Schreiner: Right. And in terms of asset management and the Mauldin Smart Core specifically, we have several strategies in the portfolio that are going to continue to participate in this run up as stocks continue to perform well. That’s what trend following strategies do we want to participate as long as markets are strong and as the great reset starts to pan out markets will inevitably rollover and things will be repriced and it’s at that time when our risk management mechanisms, where we’re going to be highly dependent on them to get us into defensive positions. John, before I let you go, do you want to plug your upcoming conference? I know we’re getting closer. May 11th and 14th.
John Mauldin: We are getting closer. We haven’t sent out general invitation yet, but it will be May 11th through the 14th in Scottsdale, Arizona at The Phoenician, opening Monday night and closing Thursday at noon so everybody can go out to the airport to get on a plane and go back home. Unless they want to hang around one of the great resorts in the world.
Brian Schreiner: I was going to say the The Phoenician is phenomenal.
John Mauldin: Yeah, we have a great lineup coming so it’s going to be fine.
Brian Schreiner: Yeah. What a great location. Well. I’m excited to be there too. Well, good, John, thanks again for your time today and look forward to hearing from you in the coming weeks in your letters and I appreciate all your work.
John Mauldin: Thank you sir.
Brian Schreiner: Have a great day.
Brian Schreiner: Okay, we’re back for the second segment of the Mauldin Smart Core Quarterly Conference Call for the fourth quarter of 2019. As a reminder, if you have any questions or would like to learn more about our investment management services, please contact us by phone or email. The phone number is (800) 891-9092 and our email address is email@example.com.
I’m very glad to be here with Michael Hee, managing director of investment research here at CMG. Mike oversees the CMG Opportunistic All Asset Strategy, also known as the Tactical All Asset Strategy, which accounts for 25% of Mauldin Smart Core.
Mike is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He joined CMG in 2009 where his primary responsibility is to oversee investment research and investment strategy development here at our firm. Prior to joining CMG, Mike was a consulting actuary and financial risk manager. He holds a Master of Science degree in Mathematics from West Chester University and a Bachelor of Science degree in Mathematics with a concentration in Economics from the University of Delaware. Welcome, Mike.
Mike Hee: Thanks Brian. Pleasure to be here.
Brian Schreiner: Thanks. I’m glad to be here too Mike. As you know, our clients get to hear from John Mauldin and Steve Blumenthal every week, but they don’t have the opportunity to hear from you and our investment team very often. So having you on the call is great. I’m really happy to have you. If you would tell us about the overall investment philosophy here at the firm.
Mike Hee: So our investment philosophy, one of our core beliefs is that when it comes to human behavior, emotion clouds rational decision making and we know from several studies in behavioral finance that emotion certainly clouds investors’ ability to make rational decisions. So you really need to avoid that as a process. What we work on here at CMG is creating rules-based, tactical strategies whose buy sell decisions are grounded in robust investment research processes.
Brian Schreiner: Mike, we have several different investment strategies here at CMG. The strategy used within Mauldin Smart Core is the CMG Opportunistic All Asset Strategy. Explain for the listeners the investment process that we use for Opportunistic.
Mike Hee: So the Opportunistic All Asset Strategy follows a rules-based approach using a relative strength, momentum and trend-following techniques. What we’re really looking to do is identify areas of strength while avoiding areas of weakness. Those strong opportunities are those that show persistency. And again, we’re using relative strength momentum and trend techniques to identify those.
Brian Schreiner: Tell us about the investment universe. What are we investing in? How many funds are available in the universe? And what asset classes are represented?
Mike Hee: As the name implies, the All Asset Strategy there are over 450 funds available and they encompass all areas of equities, fixed income, commodity space. There are both broad market equities, sector specific equities, country-specific equities, as well as within the fixed income complex. There are short term fixed income instruments in investment grade corporates, high yield, Morgan’s backed securities, pretty much the full gamut, convertible bonds, zero coupon bonds, and a number of commodity plays and MLP is also in there.
Brian Schreiner: How often do funds come in and out of the universe and what process do you use to add or remove funds?
Mike Hee: So we’re constantly evaluating the universe and if a fund closes obviously it gets taken out newer funds that over time develop a long enough track record to really go through our testing can be added. We’re constantly evaluating potential changes to the universe and we make them from time to time.
Brian Schreiner: How has the strategy currently positioned? What are your allocations today?
Mike Hee: So the strategy is currently positioned about 70% in equities and 30% in fixed income or equity exposure is, broad market equity is large cap, small cap. We have a few international, even international developed in a country specific exposure, technology, aerospace and defense, and our fixed income allocations are to a shorter term fixed income instruments.
Brian Schreiner: The other thing that I’ve been thinking about and that I know it’s on investors’ minds is the presidential election that’s going to happen near the end of the year. I read the other day that since 1952 the Dow Jones industrial average has climbed an average of 10.1% during election years when a sitting president is running for reelection. Do you expect the trend to continue?
Mike Hee: I’ll say the stock market has certainly done well over the last several years under the Trump administration and I fully expect him to rely on that to help his reelection bid. It’ll be interesting to see who the Democrats nominate and how that plays out in the markets. But yeah, I would expect that this year will be good for the stock market given the reelection of incumbents over the years has proven to be good for the stock market.
Brian Schreiner: Will that influence the investment strategy at all. The opportunistic strategy.
Mike Hee: We’re not making buy or sell decisions based on anything other than prices. So we’re simply, as I said, measuring relative strength, using different techniques, momentum and trend-following techniques. But those are all based on price and to the extent that whomever the Democrats nominate, there’s out in the prices of things and that will have an impact as to what we’re doing, but we’re not positioning our portfolio to capture something that we might think might happen if that’s the question you’re asking.
Brian Schreiner: Exactly. Thank you Mike, and thanks to everybody listening to our conference call today. Please be sure to listen again next quarter when, again, we’ll have John Mauldin on the first segment of the call and for the second segment of the call, we’ll have Steve Cucchiaro from 3Edge Asset Management. Have a great afternoon, Mike.
Mike Hee: Sure. Okay.
Brian Schreiner: And thanks again to all the listeners.
IMPORTANT DISCLOSURE INFORMATION
Investing involves risk. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. (or any of its related entities, together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
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