July 31, 2019
Senior Vice President, Private Wealth Group
Segment 1: Interview with Co-Portfolio Managers:
Steve Blumenthal – Executive Chairman and Chief Investment Officer, CMG, and
John Mauldin – Chief Economist, CMG
Segment 2 (20:25): Interview with ETF Strategists:
Steve Cucchiaro – President and Chief Investment Officer, 3EDGE Asset Management, LP, and
Haag Sherman – CEO and Chief Investment Officer, Tectonic Advisors, LLC
Brian: Hello and welcome to the quarterly conference call for the CMG Mauldin Smart Core investment strategy. My name is Brian Schreiner. I’m Vice President of the Private Wealth Group here at CMG and I’m going to be the host of today’s call.
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 Mauldin is Chief Economist and Co-Portfolio Manager of the CMG Mauldin Smart Core investment strategy. John believes that the end of the debt supercycle is one of the most profound trends that will impact your portfolio over the next several years.
And he believes the period ahead will require you to think and invest differently as we get through the great reset. In his view, the ride ahead is going to get very bumpy as we try to figure out how to resolve the massive debt and underfunded pension challenges.
Expect more Fed and Global Central Bank intervention and the use of more creative policy, as John’s friend Bill White, the former Chief Economist at the Bank of International Settlements said, “in the end, there will be inflation”.
That’s what we’ll find on the other side of the great reset. The coming environment calls for a more adaptive investment approach, a smart core. Instead of diversifying assets, Mauldin Smart Core diversifies among trading strategies.
The strategies seek growth and have the ability to respond to the global economy on a daily basis. And they do so with a disciplined investment process that seeks to minimize downside risk. Think of Mauldin Smart Core as four strategies in one managed account portfolio.
The strategist utilizes ETFs that enable them to trade across investment 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 CMG is Co-Portfolio Managers: John Mauldin and Steve Blumenthal. Steve and John will discuss the current investment environment, the economic landscape, and of course, Mauldin Smart Core.
In the second segment, we’ll hear from two of the portfolios for Asset Managers: Steve Cucchiaro of 3EDGE Asset Management and Haag Sherman of Tectonic Advisors, who will give you an in-depth look at two of the individual trading strategies within the portfolio.
As you’re listening today, if you have any questions or you want to learn more about our investment management services, please contact us by phone or email. Our phone number is 800-891-9092. And our email address is email@example.com.
Federal securities laws require us to make the following disclosure. Investing involves risks. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk.
Therefore, it should not be assumed that any future performance of any specific investment or investment strategies, including 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 an honor for me to introduce our friend and colleague, John Mauldin. John, thanks for being here today.
John: Its good to be here.
Brian: And Steve, my friend and colleague, founded our company in 1992. He’s our Executive Chairman and Chief Investment Officer. Steve, thanks for being on the call today as well.
Steve: Thank you, Brian.
Brian: And Maulin 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 risk protection and down markets.
Our benchmark is the Morningstar Moderate Target Risk Index, which tracks a globally diversified portfolio. In 2017 and 2018, the performance of Smart Core was in line with the benchmark. Through June of this year, the strategy is up 5.5% while the benchmark is up 12.1%.
Steve, this is the first quarterly conference call we’re hosting for Mauldin Smart Core. So can you give us some perspective on how the strategy has been positioned over the last few quarters, maybe going back to the fourth quarter of last year? And then also talk about how the allocations have shifted over the course of this year?
Steve: Brian, you mentioned performance relative to benchmarks, I’d like to touch on that for a second. The most important thing to understand about the strategy is that we diversify the trading strategies that all have the ability to get defensive.
We’re pleased with the performance of the strategy in the fourth quarter of last year. In that period, the stock market was down 20%. And our strategy was down five and a half percent. Much of the decline occurred in December, the market decline 9% in December of last year, our strategy was down 1.7%.
And that’s because the bulk of the managers had adjusted to the environment and positioned more defensively within the portfolio. If you look at September of last year, through June of 2019, so we had the fourth quarter, a major market decline of 20%.
And of course, a very attractive recovery so far in 2019 through June. But the equity market from September last year through the end of June is up roughly 1%. And the benchmark the Morningstar Moderate Target Risk that we look at and that Morningstar has assigned to us is a global allocation of roughly 60% equities, 40% fixed income of various different markets, various different types of bonds for the fixed income side and various different markets globally for the equity side.
So we’re very pleased with the return relative to our benchmark, the return relative to the market. And that we’ve done so in a way that we hope addresses what we believe is still coming ahead of us, which is a difficult recession, a 30 plus percent decline in the market.
Possibly similar to what we’ve had in the last two major dislocations, in the last two recessions in 2000, 2002, 2007, 2008, where the markets lost 50%. That’s our bigger concern. So we’re pleased with how this strategy is reacting and that each of the managers has a very flexible approach to their portfolio.
The other thing I want to note is that in the first quarter of this year, most of the gain in the market occurred by April 1. So the S&P gain roughly 14%. Now through the second quarter, let’s call it up another 5% to 6%. And that’s simply recovering the bulk of that 20% decline that happened in the last quarter.
And most of that can be attributed to the power pivot. I’m curious, John, if we could take a quick second and get your thoughts around where we are positioned right now, economically, globally, recession risk and your thoughts around the Fed?
John: Well, it’s like I’ve been writing in my letters, I think that we’ve now seen the inverted yield curve show up, it showed up for 90 days. I personally think that’s why the Federal Reserve is talking about cutting the, if the yield curve doesn’t go away, they’ll cut at the end.
They can’t be seen to be allowing an inverted yield curve. That problem if you will, they did that research in 1996. They ignored it in 2000, they ignored in 2006. I actually remember talking to Fred Michigan, in 2016 and said is there going to be a recession?
And he was telling me what, no, there won’t be a recession for all the following reasons. And I just don’t think they’re in the, we’re going to ignore this anymore mode. Which is why when economically everything is doing good; unemployment okay, inflation is not hurting us.
They’re seeing other things around the world slow down, they’re especially seeing this inverted yield curve. And I think they’re going to keep cutting until they get through that. That being said, the world’s slowing down, an inverted yield curve, along with some of the other things we’re seeing, tells us that a recession is out there.
Worst case, probably about nine months from now, best case 18. So either middle of 2020 into 2020, you kind of choose what you want to do. But the economy is slowing down. The inverted yield curve tells us there’s a fever in the economic body. And we don’t want to belong to a lot of things when that happens.
And I created Smart Core to be foundational to make sure that I’m going to get as much of your assets from one side of this event to the other side of the bump, if you will, without experiencing a lot of volatility. And without just simply saying I’m going to go to cash or you know, buying gold or whatever, still trying to participate in the market.
So frankly, I’ve been very happy with the way the performance has been. I’ve been happy with the way that we’re avoiding some of the big risks, valuations are high right now. The return in the S&P 500 market, if you will have been concentrated in a few stocks.
So I’m actually quite pleased with the way everything’s doing. It’s doing what I want to do, which is taking care of my clients. So they’re not taking too much risk in order to participate.
Steve: Well, Brian, you had asked about how the portfolio was allocated in the fourth quarter of last year, and how things have shifted with the allocation?
So not only do we measure each of the individuals for strategists and their activity and how they’re positioned and then we rebalance the total portfolio in aggregate. At the end of December, our portfolio had just 20% allocated to the stock market. And over 70% was allocated to fixed income.
There was some increase in gold and some short term instruments. But that was a very defensive position to have just 20% allocated to stocks. And that’s why the portfolio did so well in December and did well as it adjusted to deteriorating conditions for the equity markets in the fourth quarter of last year.
Today, equities have increased. At the end of the second quarter here, June of 2019, equities allocation increased to 39%. So we’ve seen this move up to taking risk back on. And we’re pleased with how the strategies responding.
Brian: Steve, expand on that a little bit. But I guess, I want to ask, from a different perspective, you know, when you think about a traditional portfolio and then think about how Mauldin Smart Core actively shifts. Can you talk a little bit about how Mauldin Smart Core is different from a traditional asset allocation model?
Steve: You bet. So one of the reasons that John structured it the way that he did, he sought for diverse strategists that came about managing and seeking growth opportunities but also doing so with different investment processes.
And doing so in a way that manages risk in a different nature. Two of those managers will be highlighted in the second half of this call today. One, for example, that isn’t on today’s call is Peak capital. What peak does is they seek exposure to the factors that make up the large-cap S&P world.
And so they’re seeking to gain exposures, but they measure risk based on volatility. So when volatility starts to increase, they decrease the exposure by rule systematically, in a very disciplined way. And these are managers that have a tremendous amount of skill and experience having executed over a lot of years.
So that strategy is designed probably, John, I would say it’s the more aggressive strategy within the portfolio. But it manages risk, it uses treasuries to do it. So that’s entirely different than what you’re going to hear about shortly in how 3EDGE invest in their investment process and how Tectonic allocates across a global basket of stocks and bonds.
And then risk manages with certain processes. So by not being dependent on one strategist’s performance and diversifying, it further spreads the risk, that one manager might be out of favor in a particular period of time, maybe in favor and another window of time.
And by blending them together. Our end objective is to seek moderate returns with a lot of protection against downside volatility.
Brian: Speaking of downside volatility, John, I and Steve were both at your Mauldin economics conference in May. And that was my first time and one of your conferences, and wow, just really impressed.
And even from people who attended in the past, they said it was maybe the best conference you’ve had. There was quite a consensus among the experts and asset managers around the potential for recession. And you just alluded to it yourself.
What are the most important data points on your radar right now, as we look at the potential of a recession?
John: I look at yield curves, I look at some of the things that Steve does. I look to see how Ned Davis is doing and how he puts his data out. I look at valuations, valuations are so important when you try to get into the market, and when you get out.
Actually, valuations are almost more important, but when you get back in the market after you’ve gotten out, but there are dozens of things we look at. But when you start talking about recessions, you really have to look at the yield curve.
Brian: Steve, we have a few minutes here, talk a little bit more about valuations. We’ve seen markets defy gravity if you will. But how are valuations likely to come into play in the coming years?
And why is Mauldin Smart Core uniquely situated to deal with the challenges that the high valuations placed on a portfolio?
Steve: Yes, so right, I write frequently about valuations. And they are from my perspective, very important in determining risk levels. So we can look at history and we can measure what something is worth and if we paid a lot for it, as Warren Buffett uses his example about hamburgers if you’re buying hamburgers and you pay a lot for it, you just don’t get as much for your money.
And the same goes for investing. And when the prices of hamburgers go down, the family members in the Buffett household get very excited because they get a lot more for their money. And he doesn’t understand why people don’t look at the markets the same way. I think that that’s very important.
And I also think that that’s important why allocations within a portfolio today should be weighted more towards a defensive, risk-managed type of trading strategies like Smart Core, and less towards directional long only. So let me give you a few examples.
Speaking of Warren Buffett, his stated favorite market valuation indicator is how big the stock market is relative to gross domestic income. So in English, if we were to take the price of IBM times its total number of shares outstanding, we will get a valuation for what IBM is worth.
And then if we add it up, Microsoft and Apple and Google and Campbell soup and everything else that’s out there, all the publicly traded companies in the US, you get a total stock market capitalization, you get this size of what we’re worth in the market.
And from that perspective, you can then measure what our gross income is. And when the stock market gets very high relative to what we’re all earning, then that’s a measure of whether the market is overpriced or underpriced.
Well, we can go back to 1925. And measure all these states and track how much income is relative to the total value of the stock market. Well, today we sit at the third-highest level in history, higher than we were in 2008.
And the only two periods that were higher, were the peak of the 1929 stock market prior to that crash and the peak in 2000, which was the top of the tech bubble. Okay, so what does that mean? If we look at every time, we’ve been in this highest quintile, so the most expensive 20% of markets as measured by income relative to the size of the stock market.
The subsequent returns in five years, for the S&P 500 index, the total return was just 1.41%. That means your $100,000 has grown to $101,000, five years from now. Well, that’s not the return that people are expecting, especially after the first half of the year up nearly 20%.
And then if you look 10 years out, the return is 50%. So your $100,000 go on to $150,000. Well, that’s about four and a quarter percent or so compounded annually. When what you’re paying for an asset is high, the subsequent return that you’re going to get is low.
The other thing that happens is it all the bad stuff tends to happen from these high-level of valuations. That’s where the big declines occur. They don’t occur when we’re buying in the market when it’s cheap and inexpensive and attractive.
That day will come like it did in early 2009. It was reasonably priced in 2002. And it was really attractively priced in the 80s and 90s. So these are slow-moving types of things, it can help us understand our risk. And what is signaling to us is caution, expect very low returns next five to 10 years.
Brian: Well, thank you, Steve and thanks, John. But before we conclude this first segment of our call, Steve, you mentioned your weekly letter; On My Radar and of course, John’s letter; Thoughts From the Frontline.
I think probably most everybody on the call receives at least one or maybe both. They’re both a free subscription. If you would like a free subscription either to Steve’s On My Radar or John’s Thoughts From the Frontline, just drop us an email at firstname.lastname@example.org.
And again, if you have any questions or want to learn more, that same email address, we’re happy to get back to you.
Steve: Brian, I’m going to jump in and interrupt you just want more time.
Brian: Sure, go ahead.
Steve: If you have not yet read John’s series on why Ray Dalio is kind of sort of really wrong and our recent discussion that we had a week ago about why Ray Dalio is really, really right. Do go on sign up and get the letter. It’s just a phenomenal discussion that’s important for us as a nation to have. It’s about how the period ahead is likely to play out.
Ray Dalio runs 160 billion, one of the great investors of our day. And he talks in there about the importance to position tactically and how valuations matter. And how your starting conditions matter and where we are at this point in this decade. And what the next decade is likely to look at. So thanks, Brian, I apologize for interrupting you.
Brian: No worries. Thank you very much. And thank you, John.
John: And thanks, Steve, and everybody for being here. Thank you for the kind words.
Steve: You’re welcome. Thank you.
Brian: Thank you, gentlemen.
Brian: Okay, we’re back. As a reminder, if you have any questions or you would like to learn more about our investment management services, please contact us by phone or email. My phone number is 800-891-9092. And our email address is email@example.com.
I’m happy to welcome Steve Cucchario of 3EDGE Asset Management and Haag Sherman of Tectonic Advisors. Each of these gentlemen is responsible for managing 25% of the CMG Malden Smart Core portfolio.
Steve is President and Chief Investment Officer at 3EDGE. He’s been managing investment portfolios since 1994 and is well known for his investment processes, which include the application of concepts within system dynamics, complexity, economics, artificial intelligence, and multiplayer game theory.
Prior to 3EDGE, he was Founder, President and Chief Investment Officer of Windward Investment Management. Windward reached 20 billion in assets under management during Steve’s tenure and was later acquired by Charles Schwab in November of 2010.
Steve appears in the media frequently, just a few weeks ago, he had a great interview on Yahoo Finance, which I highly recommend. You can google it or email me if you can’t find the link. He’s also appeared on Bloomberg TV and radio, CNBC, Wall Street Journal, Barron’s, the Financial Times and more.
Steve, welcome to the call. And thank you for joining us.
Steve: Thank you, Brian.
Brian: I’m also excited to welcome Haag Sherman. Haag is CEO and Chief Investment Officer at Tectonic Advisors. He’s also Managing Director at Sanders Morris Harris and Chairman of T Bancshares Incorporated, both affiliates of Tectonic Advisors.
Haag also co-founded and served in various executive positions for Salient Partners, a Houston based investment management firm, with over 17 billion in assets. At Salient, he developed several investment models and developed software that allowed them to scale their distribution. Haag also practices corporate law. He was an auditor at Price Waterhouse.
And he served on the board of directors at several nonprofit and public companies. He’s authored articles for Barron’s and MarketWatch. And he’s written a book. Also served as an adjunct Professor of Law. Haag, welcome. Thanks for joining us today.
Haag: Thank you, Brian.
Brian: Well, gentlemen, on this call, I want to help our investors get a look under the hood of the Mauldin Smart Core strategy. So they have a better understanding of how we manage their assets. So I’ll be asking each of you about your firm, about your investment philosophy or process and your recent contributions to the portfolio.
And I think to make the conversation a little bit easier to follow. I’ll focus on one strategy at a time. So first, I’ll take a few minutes with you, Steve, to focus on the 3EDGE Total Return Strategy. And then I’ll come back to you Haag, and we’ll talk about Tectonic Moderate Strategy.
So Steve, take a few minutes, if you would, and tell us about how 3EDGE was founded and about your investment philosophy?
Steve: Yes, Brian, the original concept behind the investment philosophy that 3EDGE employs actually, goes back to my school days. I was a Mathematics Major at MIT and there I learned a lot about how to analyze complex systems that are found throughout the world, that are found in science applications and engineering applications and much of the natural world.
And was fascinating to learn how to apply scientific and mathematical and computer simulation approaches to do a better job analyzing and describing how complex systems behave. After that, I went to study finance at the Wharton Schools, an MBA student and learned a whole lot about the global capital markets.
It was there that struck me that so much of what I learned in other fields; in science and engineering, could be brought to bear to the study of global capital markets in a way that the industry hadn’t addressed.
And specifically, seeing the global capital markets as an interconnected set of markets with many interrelationships among economic variables, among valuation variables, investor behavior, etc.
So the idea being, not just to accept that the markets fluctuate randomly but rather to do the hard work of digging deep and uncovering what are the true cause and effect relationships that drive the markets.
And so that is behind the original investment concept to try to take a more scientific approach, to dig down deeply uncovering what the true causal factors are that drive the various equity and fixed income in real asset markets and currencies and so on. And to describe that in a way that can be replicated and used in a systematic approach.
Brian: So when it comes down to your decision-making process, the day to day basis, how you make buy and sell decisions, talk a little bit about that.
Steve: So we think that the key approach is what we call Human plus Machine. We think that there’s no substitute to having decades of experience with a team that’s been through bull markets, bear markets that have been able to assemble a great body of research and an excellent track record over time. And that experience is just invaluable.
Having said that, there’s tremendous value in having a systematic approach that embodies all the collective best thinking of what drives markets in a way that can be objective, in a way that can be measured, in a way that can be repeatable.
So we have a Human plus Machine approach, where we use our collective experience to form the rules of logic as to what drives the markets. And then we do a deep dive using pure technology, artificial intelligence, machine learning, and other methods.
Take that information and produced risk-adjusted projected returns for the asset classes, when considering a variety of valuation metrics, economic factors, investor behavior, we put that all together.
We then as an investment committee use our experience to analyze the results of the models to see if more testing needs to be done to kick the tires, so to speak, and test some of the assumptions. And then we arrive at our final risk-adjusted projected returns that inform how we construct portfolios.
Brian: Right. So on a day to day basis, what is the output look like to when you make those buys or sells what’s on your screen? And how often do you make changes to the allocations?
Steve: So what appears as a result of this process is for every major global asset class, what we call a risk-adjusted project return, is not simply just a projected return of how we expect the asset class to perform over the next several months or years. But it’s risk-adjusted.
And we believe fundamentally that many investors and Wall Street in general, systematically underestimate the true risk in portfolio investing. After having analyzed every bull and bear market, going back to the late 1800s, we know that there are periods of time, where investors can be very complacent.
And not be aware of how suddenly a portfolio can lose 20%, 30%, 40%, 50% value. So we take great care, not only to analyze what the projected returns are but also what the risks might be.
So this combined number is synthesizing, we think are all the important value metrics, all the important economic metrics, and even looking at investor behavior and herd mentality to come up with a risk-adjusted project return for every asset class.
And we can see for the various asset classes, which have higher numbers, which have lower numbers, that informs how we create a portfolio. We always recognize that events can happen to affect the markets that are very hard to predict.
So despite being maximum bullish at a certain point in time, we’ll never put 100% of a portfolio into equities or being maximum bearish, we’ll never be at zero percent in equities. What’s key though, about this approach is unlike a lot of quantitative models that are black boxes, this is an extremely transparent approach where not only do we get our projected return, but we can see every single component contributions made to that return.
We can see exactly why the projectors room was higher low, where the contributing factors to make it higher or lower. And then that allows us transparency to test those assumptions.
Brian: Okay, thanks. So I’ll come back, Steve. I want to ask you a little bit more about the portfolio and how its position, you know, currently and take a little bit closer look at what it’s contribute to the Mauldin Smart Core.
Haag, I want to come over to you and really ask you kind of the same questions, talk for a minute Haag, about how your firm was founded and describe your investment philosophy.
Haag: Thanks, Brian. And I think that that’s the most fundamental aspect of any investment firm, obviously, as the name implies, is what is your process. Tectonic’s predecessor was founded in 2005. I became a partner of Tectonic in 2015. And really the DNA of Tectonic centers around this notion of providing a return that fulfills or funds that future liability.
So it’s really oriented, much like a pension focus, which is, a lot of our investors, a lot of our clients are saving for retirement. So they have an unfunded liability. So on a probability-weighted basis, what is the best approach to funding that future liability?
And so our focus is really trying to generate a fair but consistent return while mitigating downside risk. And so my background at Salient Partners and before that, you know, I was fortunate enough to be exposed to some of the smartest investors in the world. And they all had, you know, similar philosophy and focus.
And I think you know, the good thing about what we do today is you’re exposed to brilliant thinkers like Steve and Fred’s or Steve Blumenthal, or John Mauldin or Jeff Brian at Peak. I think that we really look and refine our process periodically, not frequently, so that we can continue to develop our edge.
So that’s really our investment philosophy, which is you just a slow, steady compounding of capital. And then looking at what the risk looks like in the marketplace and making sure that we’re deploying capital appropriately.
Brian: Okay, and talk about the investment university you choose from; the asset classes. What asset classes do you generally invest in? And how do you benchmark the portfolio?
Haag: Sure, good question. So stepping back and again, how this philosophy was developed and then I’ll talk about the investment universe. You know, I was very fortunate early in my career to be exposed to the Bash family office out of Fort Worth.
And then at Salient, we developed a Risk Parity Strategy. And so really, if you look at how we invest, we have a broad universe of investable assets. And so like Steve we’ll use ETFs, and he was absolutely a pioneer in the space, we have a global approach.
In effect, the three main blocks of our portfolio are equities, both domestic and international. So we have a global approach. And that tends to be up to about 15 or so securities. We have commodities, which is obviously our inflation hedge. And then we have rates and sovereign debt. And so those are the three main blocks of our portfolio.
And what we call normalcy, which is the degree of stability across our asset classes will be fully invested in over 30 underlying ETFs spread across those three main components. If you see instability in an asset class or within a segment of equities, for example, we will reallocate to a broad-based equity strategy.
So we have an energy sector allocation, energy sells off base on our metrics, it doesn’t go to cash. It’s reallocated within our equity slate to a broader-based S&P index so that we remain invested but allows us to rotate in and out of sectors that maybe just have some idiosyncratic risk or correction without losing exposure to the asset class.
Then ultimately, we have safe havens where if your cascade completely out of equities, then you cascade into fixed income and then cash. And like Steve will never be 100% cash, won’t be 100% fixed income. But we will cascade out based on volatility, market action, and valuations into more stable asset classes to avoid the big drawdowns in the capital that tend to destroy wealth.
And we bench ourselves again against a global balance stock and bond portfolio. So 60/40 index and we expect over time to get 60/40 returns, global returns, balanced returns with about 20%, less standard deviation and obviously, cutting large drawdowns significantly.
Brian: Speaking of large drawdowns, the end of 2018, we saw volatility come back. And this just kind of leads me to questions about your strategy in recent market history and the current market landscape. Haag, talk for a few minutes about the portfolio, start wherever you’d like if you want to be in 2018, fine. And let us know how the portfolio has performed and where we are today and how you see markets.
Haag: Sure, I think that if you look at 2018, in a global 60/40 stock and bond portfolio was down over 6%. You know, our portfolio was down last year, but call it about 2.3%. So if you looked at, you know what our portfolio did, it did about as we anticipated.
And so we cut the drawdown significantly, the severe index and performed well. But the cost of that is as the markets reflate, our portfolio won’t immediately start reinvesting until we see some degree of stability and asset classes. So it’s going to lag and it did lag in the first quarter but started stabilizing in the second quarter.
So if you look at the year ended at 630. So the one year ended 630. We’re up about 5.1%, the global 60/40 up about 5.8% after a nice run in the first half of this year. So again, cutting the drawdown significantly, getting reinvested and then participating, you know, on the upside once reinvested.
Then market performing or close to it against the 60/40. That is really what our goal is. And I think that if you look at what this portfolio has done during a fairly heady equity market, not so much globally, but certainly in the US since inception, we perform consistent with, you know, our philosophy.
As far as going forward, you know, obviously, we have a firm outlook and a farm view and I think our firm view is that you know, obviously the US has done the best performer from an economic standpoint and also largely from a market standpoint over the past several years compared the other developed countries.
Our rates are higher in 10 years, just a tad below what the great 10 year is. And if you start looking at that and penciling out what it looks like going forward, we think the US rates which have been trending down will continue to trend down as the fiscal stimulus that course its way through the system after the tax cut, starts to wear off.
And I think that will trend back down to 2% GDP growth rate, assuming we don’t experience the recession and the yield curve will continue to be flat but shift downwards. So you know, we take the 10 years will continue to trend downward, especially as the Fed starts to cut rates.
And so I think that we think that baseline growth, normalized growth absent a fixed stimulus program like we had, is going to be sluggish at best. We think there are structural reasons for that, structural both from a population and aging standpoint. But structural also as it relates to the economy and the velocity of money.
But the good news from a portfolio standpoint is we can absolutely be wrong and our portfolio can still perform very, very well. Because, as Steve said, the construct of our portfolio, there’s a lot of thought and experience that goes into it.
But we try to remain balanced unless the markets break down, in which case we cascade in safe haven. So in general, our philosophy and our view are we’re going to remain fully invested, especially during normalcy.
And normalcy doesn’t mean the markets going up, normalcy means the markets haven’t broken down in our views can be wrong and we can still deliver a nice return.
Brian: Thanks. Steve, I want to turn to you. I know you guys recently hosted your View from the Edge podcast and I think your monthly letter as well. And I always look forward to reading. I think those are available to investors on your website if they care to see that.
Give us a summary of what you guys talked about in terms of the strategy and how it’s performed recently and your outlook.
Steve: Well, right now, we are positioned more defensively than we typically are. And we have strong convictions around that. And by way of example, if we go back to as you mentioned, December of 2018, it was a month where the US stock market fell at one point during the month, almost 15% and close the month down almost 10%.
And by being defensive, our strategy did not make money in December, but we’re only down just over 1%. So being defensive can really help. And if you can minimize the pain on the downturns, then your compound returns over time, and do quite well.
We are defensive because of the conviction we have coming from our analysis and modeling. We have three key investment themes right now. One is that we do think the US markets are overvalued and more overvalued than many people might recognize right now.
In fact, we think over the last century, the US markets are now third most overvalued they’d been since the last hundred years. The most overvalued by our metrics was back in the crash just before the crash 29. And the second most of valued by our metrics is just for the tech stock bubble burst in 2000.
And we think this is third-ranked, so we are defensive. What that meant was in a month like December, we look very good relative to the market. So far this year, we are making positive returns, but not as much as we would make if we were fully invested in US stocks. However, we think that this is time to be prudent and that the market is in a dangerous place.
Second is that and this echo a bit of what Haag said. We’ve seen ever since the financial crisis in 2008, the US stock market greatly outperforming not only every other major equity market but virtually every major asset class in the world. And it’s going on for over 10 years.
And the pendulum swings back and forth and you have a decade like this preceded by a decade that we had before financial crisis where the US stock market underperforms virtually all the other asset classes and other equity markets. And we think that the pendulum it about swing back.
And the next 10 years might look very different than the last 10 years. We see emerging markets is a market that’s seriously underperformed. And from a valuation basis already prices in a lot of bad news that could happen in emerging markets. So we see relatively more value in emerging markets.
And finally, similar to what we found in the early 2000s. It was very constrained at the time, but we think we’re in the very early stage, what might be a major bull market in gold prices. We think that every major central bank in the world is trying very hard to stimulate with monetary policy.
And we see in Japan, they already have negative interest rates. In Europe, now they have negative interest rates. They’re cutting rates here in the US, but it hasn’t been enough to stimulate economic growth.
So we see a bit of a race to the bottom with the monetary stimulus that will weaken fiat or paper currencies. And the one currency that you can’t simply print at the whim of the central bank is gold.
So it’s real or inflation-adjusted interest rates fall, we think gold will see another big run-up, might not happen right away. But once the Fed starts cutting more seriously, we could see the beginnings of the next bull market.
Brian: Well, I can think of a few clients who will be encouraged to hear your thoughts on gold. Gentlemen, that concludes our call. Thank you so much for being with us. And I want to thank Steve Blumenthal and John Mauldin as well.
Thanks for listening to our conference call today and please be sure to listen again next quarter when my colleague Avi Rutstein will host the call. John Mauldin and Steve Blumenthal will join us again.
And we’ll be featuring two other Asset Managers in Smart Core: Brian Lockhart of Peak Capital Management and Michael Hee; Managing Director of Investment Research here at CMG.
Thanks and have a great day.
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