Did you know that etherium was the best-performing asset in 2017, up 9,312%? Among those who hope to identify the non-consensus outperformers in 2018 is Mark Yusko. In the tradition of Byron Wien, he identified his 10 biggest surprises for 2018.
Yusko spoke at the Investments & Wealth Institute (formerly IMCA) Investment Advisor Forum in New York on January 16.
He is the founder, chief investment officer and managing director of Morgan Creek Capital Management, a hedge-fund manager based in North Carolina.
Following Warren Buffett’s victory last year in a wager that he could outperform a portfolio of hedge funds over a 10-year period, Yusko offered to make the same wager with him over the next 10 years. Buffett declined to make another wager, citing the fact that he was 87 years old.
Yusko said that he typically gets seven or eight of his predictions right. I’ve listed them below, although I’ve omitted the technical analysis that Yusko used to justify many of his predictions.
1. Actions speak louder than words
The consensus is that rates are going up, Yusko said, and it spells the end of the bond bull market. He disagreed.
Financial conditions are loose, he said, and nobody is tightening. Yusko said there is $8 trillion of debt carrying a negative yield. Yet the Fed funds rate is at a “crisis level,” he said. Why is that? The Fed is taking its balance sheet down, but if they do rates will go down. The Fed funds rate is reaching its peak and the Fed will not hike as often as the consensus expects, Yusko predicted. Indeed, he said the Fed will never lower its balance sheet because of demographics. Our aging population wants to buy bonds and won’t spend money to boost consumption and stimulate the economy. “The Fed will have to bail us out as we age,” he said. The same happened in Japan, Yusko claimed, which is now at zero interest rates, reinforced by government policy. “Rates will go down,” he said. “The long end is telling the Fed it is making a mistake. If we don’t get above 3.05% [on the 10-year Treasury] we are still in a downtrend.”
2. The bears are back in town
Yusko thinks U.S. equities will have a bad year.
If the Fed actually lowers its balance sheet, Yusko said, the market will react negatively. Fair value is “really far below” where we are now, according to Yusko. In 2017, stocks had almost the same return as in 1927. “We’ve created the biggest global debt bubble in the history of mankind,” he said. “It takes more debt to generate a dollar of GDP than ever.” Yusko said we’ve had the worst seven years of GDP growth in history. Central banks have purchased as many bonds in 2017 as they did in the depths of the great financial crisis. “Eventually that will have repercussions,” he said. Quantitative easing (QE) creates inequality through asset-price inflation. Buybacks are the “bubble juice,” he said, but that is starting to fade away. Gold is priced way less than in the bubble of 2007, he said. China saved the world in 2009 by putting $4 trillion into the world economy, and we shouldn’t expect that again, according to Yusko.
3. VIX is not dead, just resting
Prepare yourself for more volatility, according to Yusko.
Volatility was so low in 2017, U.S. equities turned in their highest Sharpe ratio (4.36) ever, he said. The average Sharpe ratio for the market is 0.5. It was the least volatile year ever, with a standard deviation of returns of 3.89, lowering the historical average from 15 to 13, he said. People are selling hedge funds and buying index funds, according to Yusko. Equity volatility is lower than bond volatility, and there has been no 10% correction in almost two years. “Everybody is all in,” Yusko said.
4. FANGs finally bite
The performance of the FANG stocks (Facebook, Amazon, Netflix and Google) will disappoint investors, Yusko said.
“It’s their nature,” he said. It has been 18 years since NASDAQ peaked, and he said it finally regained its 2000 peak last year. In the second quarter of last year, Yusko said that all the gains in the market went into five stocks. Amazon’s increase last year was bigger than all of retail and more than that of all the stocks in Italy. “Gravity rules,” he said. “Every company starts with high growth and goes to low growth. It happened with Apple. Every single company in the FANGs will look like Apple.”
5. Look out below
The era of the dollar as the reserve currency is over, Yusko predicted.
Dollar hegemony is gone, and the dollar is heading down, he said. When the Fed raises rates, the dollar goes down. The long-term downward trend isn’t going to change, he said. China wants the renminbi to be a stable currency, and it is not in a downward trend, Yusko said. The emerging market will rally and the dollar will be at 90 [based on the DXY] by the end of the year, he predicted. The U.S. lacks growth and stability in policy, yet it is still viewed as a safe haven. “The dollar’s sole role as hegemonic currency is over,” Yusko said.
6. Never poke a sleeping bear
Consumers can look forward to cheaper oil prices, Yusko said.
We are at the short-term peak in oil prices, according to Yusko. Oil production will be 10 million barrels per day and will top production in Saudi Arabia. Shale will do well and oil prices will be under pressure in the second half of the year. “Oil is overbought relatively to history,” Yusko said.
7. The long arm of Abenomics
Investors in Japanese stocks will do well, according to Yusko.
He predicted that the Nikkei will hit 27,000 by the end of the year. (It is now approximately 23,800). The “print and spend” policies in Japan will continue and the Abenomics recovery will be very strong, Yusko said. Everything is good in Japan except for too much debt, he said. But, he predicted, there will be a “debt jubilee” and Japan will cancel its debt. “Japanese equities are breaking out,” he said. The government owns 74% of ETFs. “This bubble is going to inflate,” he said, “but equities are still cheap.”
8. Europe comes out of its coma and is no longer an open-air museum
European equity performance will dominate over the next decade, Yusko claimed.
The stimulus from the European central bank has been extreme, he said, “but it’s working.” Earnings growth in Europe is 40% – way better than in the U.S., Yusko claimed. Equity price growth has been capped by the thread of a taper, he said, but that will change. “The peripheral markets are the place to be – especially Greece,” Yusko predicted.
9. Emerging markets' decade of dominance begins
Along with Europe, investors should be overweighted to emerging markets, according to Yusko.
Emerging markets are in for a decade of dominance, Yusko said. Indeed, he said, the decade of dominance is “just beginning.” The emerging markets could go up a lot over the next 10 years. They represent 40% of global GDP buy only 10% of global market indices. “You can buy the emerging markets at a great discount and “learn to live with the greater earnings,” Yusko said. “It’s not always easy because of the home market myopia.” He said that Alibaba will be the most valuable company in the world in five years and that China will be the best-performing market in 2018.
10. It’s time to get real
Investors should own commodities, Yusko said.
This is the time to buy “stuff,” Yusko said. Chinese growth is closer to 12%, since it is actually understating its growth. “It is underreporting its growth, based on electricity usage. You have never had a better time to buy real versus financial assets. Sell paper buy stuff.” It’s a great time to buy commodities, according to Yusko. “Sell some stocks and buy a little gold, which is as cheap as it was in 2000.”
11. A bonus surprise
Bitcoin and blockchain-related investments are not in a bubble and investors should own them, according to Yusko.
“Blockchain is a truly disruptive technology,” Yusko said. “It will do to value and money the same thing as the internet did to commerce and communication.” The consensus is it is a bubble and a fad, he said. “But the reality is that it is really big. It is not in a bubble.” Yusko said that blockchain-related investments are in parabolic growth curve. “We are going to take over money as we know it and replace it,” he said. “The more governments fight it the stronger it gets it. Don’t listen to the naysayers. There is nothing we can do to stop it because of the network effect.” He claimed that more bitcoin accounts were opened in December than in Charles Schwab. “This is huge and we’re just getting started,” he said.
Read more articles by Robert Huebscher
Did you know that etherium was the best-performing asset in 2017, up 9,312%? Among those who hope to identify the non-consensus outperformers in 2018 is Mark Yusko. In the tradition of Byron Wien, he identified his 10 biggest surprises for 2018.
