2014 SALT Conference
Over the past few years the early weeks of May have been an opportunity for me to participate at the SALT conference in Las Vegas. Each year, the collective intellectual capital in attendance seems to offer a prevailing macro theme for the capital markets to be concerned with or view as a source of investment opportunity. At last year’s conference, for example, it was widely discussed how the balance of 2013 could provide investment opportunities in Japan, S&P 500® Index beta equities, and mortgage-related securities. Those observations were all correct.
For me, the 2011 SALT conference was clearly the best. That event occurred in the days following Osama Bin Laden’s death and ironically President George W. Bush was the keynote event. The one on one between CNBC’s Melissa Lee and President Bush was fascinating. The S&P 500 Index (SPX) (Figure 1) actually recorded its high for 2011 in the days leading up to the conference, and those in attendance heard about the many potential headwinds that ultimately contributed to that year’s underperformance. That’s value added, which SALT has a unique way of achieving.
I said the 2011 SALT conference was the best I ever attended, that is until this year. 2014’s SALT conference was an incredible collection of social, political, economic, and wealth management capital. My days were filled with CNBC appearances, participation on panels for financial advisors, plus informal meetings and formal dinners. I had the opportunity to share ideas with Leon Cooperman, David Tepper, Jamie Dinan, Steve Kuhn, Ken Lagone, and Jim Chanos, to name a few. I gained incredible political insight from former British Prime Minister Tony Blair, General David H. Petraeus, James Carville, Harold Ford Jr., David Plouffe, Valerie Jarrett, and Karl Rove. Lastly, for any of us fortunate enough to attend lunch with Earvin “Magic” Johnson, well, we know why he is called “Magic.” What an inspirational 90 minutes that was.
So allow me to share some quick bullet-point observations from the conference that I suspect will impact the capital markets for the remainder of 2014…
- Clearly the prevailing theme is the question of why the U.S. 10-year Treasury yield (Figure 2) is below 2.50%. Quite candidly from the many views that were offered, we can call it the “grand mystery” of 2014 – nobody seems to know why, which is a surprise to the overwhelming majority, including myself.
- My suspicion is that “behavioral finance” might be more important in 2014 than earnings or the macro environment. The consensus on each asset class and individual stocks is wrong and pivoting to reposition and adjust weightings accordingly. That is creating confusion and the absence of a clear “tailwind theme” for a particular asset class for the first time in many years.
- I still believe the current quarter has the highest probability to be a down quarter. Certainly that is the case for the Russell 2000® (Figure 3) and Nasdaq 100 (Figure 4). Nothing I heard this week suggests to me that those two indices will quickly reverse their respective second quarter declines.
- David Tepper’s “less bullish” sentiment comments on Wednesday evening were not a surprise to many who know him or myself. That was portrayed to be the catalyst for Thursday’s sharp SPX (Figure 5) decline; I disagree, this is just an excuse. Please remember Mr. Tepper is just “less bullish” on equities.
- Deflation seemed to be a buzzword feared by many at the conference. I agree with the deflation fears but would offer the fear should be concentrated outside the U.S. Our monetary policy was the first to aggressively monetize our debt and thus “export” our deflation. Therefore, U.S. assets should remain the first choice for 2014.
- Accelerating M&A was widely discussed and the expectation is that it will continue in 2014. I suggested on a panel Monday that the increased M&A neutralized the domestic deflation fears. Why would a U.S. CEO acquire another company if deflation prevailed? In a deflationary environment, he would acquire that same company at a cheaper price in the months to follow. CEOs would not be acting now as evidenced by the 50% year-on-year M&A gain.
- Karl Rove argued the Republicans would gain significantly in the House and Senate if they newly position themselves as the party of “economic reform.”
- James Carville offered a challenge with a confident declaration that Democratic leadership since the mid 1940’s has been the best harbinger for strong economic growth and equity returns.
- Former British Prime Minister Tony Blair seemed very concerned about the lack of a resolution to the Syrian crisis, even more so than Ukraine.
- Surprising to me was how many, from Ken Lagone to Harold Ford Jr., expect no compromise on a U.S. repatriation tax holiday or the Keystone Pipeline. The overwhelming sentiment was that nothing gets done in D.C. until after the 2016 presidential election. Given how bad 2014 consensus expectations have been for asset classes, maybe that means something will actually get done. We can only hope.
- A few years back, nearly all money managers in attendance at least had an opinion on the emerging market asset class (Figure 6). Surprising to me this year, the emerging market asset class was barely discussed. Even further, when it was the rare mention, it was quickly glossed over. Interesting.
- Lastly, going back to Magic Johnson, I’ll end with the great advice he offered from his basketball playing days and in his current role as one of America’s leading entrepreneurs. Magic’s advice, no matter what, “always, always have an exit strategy” seems fitting for the capital markets in 2014.
Figure 1: S&P 500 Index 2011
Figure 2: U.S. 10-Year Treasury, Prior 365 Days
Figure 3: Russell 2000 Index, Prior 365 Days
Figure 4: Nasdaq 100, Prior 365 Days
Figure 5: S&P 500 Index (SPX), Prior 365 Days
Figure 6: MSCI Emerging Markets (MXEF) Index, Prior 365 Days