2019 Spring Grant’s Conference

Hamilton & Company professionals regularly attend various investment conferences and symposia in furtherance of our continuous research into both individual managers and the investment environment at large. As has been our practice, we intend to share with you occasional summaries of these events.

On April 9, we attended the spring Grant’s Conference in New York City, hosted by Jim Grant, publisher of the influential newsletter Grant’s Interest Rate Observer. As we’ve noted in past dispatches, we consider this event of particular interest both for the intelligence and diversity of its presenters as well as the quality and influence of its audience.

No particular theme dominated, though there were a number of gems among the various presentations. Highlights included:

Wendy Battleson and Guilia Costantini, co-founders of Art Strategy Partners, which advises buyers on art transactions, gave an overview of the evolution of the art market and the (negative) impact that the advent of the sophisticated financier as collector has had on the traditional auction houses, which, due to fierce competition, have been lured into disadvantageous sale agreements. They argue that enterprises such as Christie’s and Sotheby’s are endangered, as the next, younger generation of collectors will pursue art increasingly through high-end art shows and on-line sales. They only semi-jokingly envision a role for Amazon in the art market.

Bob Farrell, former longtime chief market analyst at Merrill Lynch, and a legendary “technical analyst,” who seeks to divine future market moves in part by scrutinizing chart patterns, price data, and other shorter-term, non-fundamental indicators, discussed how markets had changed over the course of his 60-year career, leading to him to place less faith in traditional technical analysis. Developments such as the decimalization of stock prices, the rise of algorithmic trading, and the use of dark pools, which impede price discovery, have led to a world, Farrell said, where “you have to be very careful about how you interpret based on the past…This is not a world anymore where you can say ‘nine times out of ten, when this happened, it led to this’.” For what it’s worth, Farrell expects major indices to reach new highs “before we get in trouble,” though get in trouble we will, he says. He anticipates “below-average” equity returns over the next decade.

Hedge-fund-impresario-turned-part-time-politico Anthony Scaramucci spoke in promotion of his new book about his 11-day tenure in the Trump Administration. Scaramucci expressed support for the president and his pro-business policies, though he sounded cautionary notes regarding the future. “I like the market here,” he said. “But I don’t like where we’re going.” Indeed, as investors, Scaramucci opined, “We are in for it.” Among the looming problems he cited were the nation’s growing income inequality, which he suggested could lead to unrest, along with a general lack of altruistic leadership in Washington. “I got an 11-day PhD in how these people work,” he said, “and there’s a very big difference between ruling and serving.”

A Johns Hopkins professor named Steve Hanke, one of the world’s foremost experts on hyperinflation, gave an enlightening briefing on the subject. Hanke noted that today’s most obvious example, Venezuela, with an annual inflation rate that stood at 92,284% on April 8th, was “actually pretty modest by hyperinflation standards.” By way of comparison, in January of 1994, monthly inflation in Yugoslavia clocked in at 313,000,000%, while in Zimbabwe in 2008, prices doubled roughly every 24 hours, coinciding with a 79,600,000,000% monthly inflation rate. There are two primary ways to stop such inflation, Hanke said. The first is to take the ability to print money away from the central bank and assign it instead to an outside currency board, while simultaneously pegging the local currency to another, more stable, currency. The second is simply to discard the local currency and make a stable foreign currency legal tender. Fortunately, Hanke is not predicting such inflation in the United States anytime soon.

Finally, retired Santa Clara University professor Edward McQuarrie made a presentation questioning one of the longest-held and most sacrosanct assumptions that underlies modern asset-allocation practice: The notion that stocks can be expected to outperform bonds over long periods of time. Specifically, McQuarrie reexamined the analysis, promulgated by Jeremy Siegel in his 1994 book “Stocks for the Long Run,” that equity investors could expect a 6.6% annual return over long periods of time, and that stocks would handily outpace bonds. McQuarrie assembled significant additional historical data on stock and bond performance, and demonstrated that over rolling 20-year periods, bonds beat stocks more often than not during the 19th century, while stocks enjoyed an edge—but not as often and not as large as Siegel wrote—over the 20th  century. Moreover, McQuarrie argued that the 20th-century outperformance of equities was attributable almost exclusively to a discrete post-WWII boom—in other words, a historical anomaly. McQuarrie did not make any representations as to what the 21st century would bring, though he did contend that investors should not assume that stocks will produce higher returns in the future. His exercise, in toto, pointed up the perils in asset-allocation that relies upon historically based return assumptions.

In closing, it’s worth mentioning that, in addition to the conference, we also recently attended a private dinner with Jim Grant, at which he stated that, given the persistence of historically low interest rates, conditions in the debt market were the most extreme he’d ever seen. Asked by an attendee what Grant would suggest to investors, he replied, “Use a lot of imagination.” We agree, and stand ready, as always, to share our imaginative ideas to assist you in navigating the markets and achieving the investment results you define as successful.

Should you have questions or wish additional information, please contact your consultant or me, Kendall Hamilton, at (609) 452-0300.