Attendance at the keynote addresses was as healthy as ever. Money Show CEO Kim Githler led off with her rundown of this year's big themes: capital preservation, "big picture" thinking, the new normal (i.e., low returns), adapting to change, and due diligence. I'll add one more theme: Ms. Githler is one hot chick for a gal who's been running these shows for three decades. Her husband is one lucky guy.
Speaking of her husband, Money Show Chairman Charles Githler was up next. That guy looks as ageless as Dick Clark did in his TV heyday. He likes the Bay Area's tech emphasis and thinks biotech and medical will continue to be strong performing sectors. I dunno, Charles, if the rest of the weekend's key speakers are right about the coming deep recession, those sectors will be hard pressed to find consumers who can afford new drugs and treatments.
Jeff Rabin from Artvest Partners was the first guest speaker on a topic that some of the more well-heeled folks in attendance could appreciate. He described a methodology investors could use in evaluating works of art as investments. I noted that his risk-adjusted returns of the most prominent art styles were all over the map, and Jeff explained that contemporary art is the most volatile style. Most financial writers never get past the most common observations about art as an investment, namely its illiquidity and low correlation with equities. Jeff shared plenty of insights that those of us outside the art world would never have discovered: Chinese art buying has grown massively but is mainly focused on repatriating traditional Chinese art that has left the country; art sales are seasonal (Fall and Spring) and auctioneers set prices using estimates based on the last season's sales; investment-grade art metrics include the frequency and prestige of an artist's exhibits and the reputation of an artist's dealer. Jeff also believes it's important for investors to know everything they can about an art fund's people. The ones with special dealer relationships may dump unattractive or unmarketable art into a fund while diverting that dealer's best art into private sales. It's funny how that reminds me of equity underwriting. Morgan Stanley got stuck with a whole bunch of Facebook shares from its IPO and dumped them into its proprietary funds for sucker investors to buy.
Donald Luskin was up next. He's the prime mover behind Trend Macrolytics who gained some Internet notoriety in recent years for his market commentary. Just do a web search of his name and see what he stirred up. His thesis at the Money Show was that the spending cut portion of the looming fiscal cliff should not be nearly as frightening to markets as the potential impact of the tax changes. He even had the tape measures and buckets to prove it physically. He argued that raising taxes on dividends will make investment returns suffer and that allowing the Bush tax cuts to expire will destroy the spending power of Americans who receive refundable tax credits. I personally have no objection to dropping the economy off a fiscal cliff. The short-term sinkhole that will open up under GDP growth is a necessary correction to decades of extravagant consumption. I say bring it on, along with some bear market ideas for making money on the short end. His math may be correct about negative nominal GDP growth next year if we go over that cliff but I disagree with his prediction that a Romney-Ryan electoral victory with 50 U.S. Senate seats for the GOP will come to pass in time to save us. Americans like to re-elect their Presidents, and sitting Administrations have all the advantages of incumbency when it's time to pull out all the stops and dress up a troubled economy.
Bob Rice of Tangent Capital spoke about one of my least favorite topics, alternative investments. My faithful readers know how much I despise the claims put forth by hedge fund managers that their leveraged bets on equities and debt somehow constitute a whole new asset class. Bob threw out a reference to the Yale endowment's seemingly stellar performance, with no mention of how David Swensen's model appeared so badly broken during the 2008 crisis. Do some searches way back for news on how many university endowments' lack of liquidity in 2008 made them seriously consider cutting enrollment, financial aid, and student services. I'll give Bob credit for covering the need for liquidity when he said that having cash during the next crisis could make someone the next Warren Buffett. That one's coming IMHO, and my cash is ready. Bob strikes me as being a lot smarter than your typical alternative investment guru. He likes three broad alternative themes: hard assets (art, gold, timber, water, TIPS), income funding (MLPs, REITs, CEFs, royalties, multi-asset ETFs), and alpha/growth (private equity, venture capital, distressed/activist investing). I definitely get the alpha/growth theme and even non-accredited investors can get in on that action if they can fund a five-figure angel investment or have expertise relevant to a local turnaround or workout situation. My disagreement is with some of the stuff he put is his income category that is clearly based on traditional equities, like MLPs and REITs. I'd also put TIPS in the traditional bond arena and water stocks where they belong, in the equity universe. That reduces alternative investments to things that are truly illiquid, private, and specialized, giving folks like Bob plenty of options.
Steve Forbes was up next. The guy has natural comic timing and ought to consider a second career in entertainment. Here's one rich heir who does well at the family business. Anyway, I could almost hear Steve's old political campaign mantra of "hope, growth, and opportunity" echoing throughout his speech. He claimed the election presents a stark choice between government control and freedom but I'm not buying that partisan canard. The two major party candidates are more alike than different, and Steve should know that Romneycare was the textual basis for Obamacare. I like Steve's use of cute rhythmic phrases, red meat for this mostly conservative-leaning crowd. Samples: "Entrepreneurs turn scarcity into abundance and luxuries into commodities." "Governments are about coercion; markets are about choices and abundance." That's great, Steve, but Reagan gave America its addiction to deficit spending and Bush got us hooked on government intervention through bailouts. Republican politicians would have more credibility with investors if they actually practiced what they preach over at the Heritage Foundation and Hoover Institution. I'll give Steve props for a couple of good observations, namely that the Fed's ZIRP makes credit prices unreliable and that only big corporations can now get credit thanks to government subsidies. I just don't think any of that will change after any national elections. He closed by predicting that the current Administration won't cut spending because it's a source of political power. Yeah, that's true for domestic spending on EBT and solar sector loan guarantees, but Republicans don't like to cut defense spending and that is something the country has to do for its fiscal sanity.
The free panel on the so-called next Silicon Valley investing boom was one I largely pooh-poohed for its lack of real insight. I'll buy the observations that low P/Es attract investors to tech stocks (hey, getting a growth stock at a bargain price is no easy feat) and the claim that internal IT departments will go obsolete in ten years. That jives with what I heard at the Enterprise 2.0 conference I attended earlier this year. I did scratch my head at some of the sector conventional wisdom they threw around. The panelists were unanimously bullish on Apple. Uh-oh, strike one. Somebody tell these guys that China's cloning shops don't care about Apple's patent victory over Samsung. They may be correct in predicting that mobile computing will displace desktops, but the timing all depends on whether a new recession destroys consumer spending to the point where people take a hard look at whether they can really afford another broadband subscription. I liked their observation that Facebook needs a new CEO but won't get one as long as Mark Zuckerberg's super shares keep him in control of the board. Read between the lines, investors, and see the unfolding disaster that is Facebook's strategic direction. Read my own blog posts on Facebook's prospects if you need more clarity. Anyway, the panel was pretty bullish on robotic manufacturing as a disruptive force (with major structural unemployment coming) and the health care sector thanks to the massive spending coming from Obamacare.
The one seminar I truly valued over all the others was John T. Reed's recap of the lessons he's learned from a career in real estate investments. I shall devote an entire blog post to his insights later this week. I love this guy's books. The chance to hear from him live and ask him questions was a goal I had to fulfill.
I started Saturday by listening to John Thomas, the Mad Hedge Fund Trader, predict a likely recession for 2013. I participated on an expert panel with John at last year's Hard Assets Rare Earths Investment Summit and I respect the prodigious effort he puts into his research. He did his homework on Europe's troubles and the possibility of a European banking system collapse if it doesn't get a bailout. John was more pessimistic than any other key speaker I heard on the subject of the fiscal cliff's likely effects, predicting a 3-4% hit to GDP next year. I'm also in the pessimist camp.
Alex Daley's talk on technology trends gave me a pointer on how a new tech takes off. He said fortunes are made when the curves for accelerating growth, innovation, and adoption all intersect. The lead-up to that slide with all the curves intersecting was compelling, so you just had to be there. The bell curve of adoption even used the awesome "crossing the chasm" meme that I've admired for the past couple of years. I'm intrigued by his picks of 3D printing, service robotics, and gene sequencing as big future tech themes. I do wonder about his bullishness on Amazon and Netflix for their presence in digital online sales. Those two firms have troubled business models with low margins. I maintain that a more likely future for online content distribution is the YouTube model of self-generated content, where eventually lesser-known authors and artists can keep all of their earnings. He's also bullish on the U.S. economy's potential for innovation but IMHO we'll need a Sputnik moment to shock ourselves into STEM investment if we're going to live up to that potential.
More awesome seminars awaited me. The Macquarie seminar on infrastructure investing, the talks on master limited partnerships (MLPs), the crowdfunding gurus, and Anthony Muhlenkamp's talks on natural gas and fiscal policy were more than worth my time. They each merit their own in-depth treatment in separate blog articles, so be patient for the rest of this week. I have seventeen pages of notes and a stack of printed reference material to wade through thanks to this awesome conference. I will also write a special article on Marilyn Cohen's bond ideas, because she has so many praiseworthy insights that she deserves special props.
The final keynote speaker of the weekend was Harry Dent, a prognosticator with an eye on one very overlooked variable - the demographic forces that converge around age 46, the peak spending year of a human lifetime in the developed world. That one data point graphed against long-term stock market moves is a pretty cool indicator of market peaks and troughs, although I'd like to see a peer-reviewed academic take on its statistical validity as a predictor (and whether it applies equally well to emerging markets with less developed middle classes). I'll never forget his argument that young people's spending habits make them inflationary and older people's declining consumption make them a deflationary force. His argument against buying real estate now is probably spot on as Baby Boomers downsize their living arrangements (and eventually, as he noted to guffaws in the room, to a hospice room and then a coffin). China's policy discouraging population growth will put a lid on any demographic drivers for innovation, spending, or growth over there after 2015. He's the latest in a line of China bears I've seen, making me even more convinced that getting rid of the last vestige of my China equity position is a wise thing for me to do. I'd rather not be tied to such a stagnant economy even if the U.S. isn't going to do much better. I can't help but notice the similarity between Harry's "Four Season Economic Cycle" and the demographics behind the Fourth Turning theory of civilization. His insight that we are due for a "winter season" to clear out economic excesses matches exactly the Fourth Turning prediction that the world is due for political and cultural hardship.
Harry's take-aways were stark. Banks that win the foreclosed real estate game will get ahead of that ticking time bomb by dumping houses first, but this will cause an avalanche of dumping that he thinks even the Fed can't stop. Fed QE hasn't launched inflation because money velocity has collapsed, but IMHO he left out the crucial reason for that: the Fed's attractive deposit rates for banks have kept all that excess liquidity locked into bank balance sheets and out of lending circulation. I hope Harry is prepared for the politically-driven forced lending that I think will be one of several transmission mechanisms for inflation once the Fed panics in a stock market crash. Harry's conclusion was that there are no safe havens. A crash in everything, including gold and silver, is likely in early-to-mid 2013. It's hard to argue with a conclusion that already reflects so much of my own thinking in the four years I've been publishing my blog.
I'm so glad I went to this Money Show. Hey, Mr. and Mrs. Githler, put me on your speaker calendar for the next round of shows. I'll be happy to fly to any of your other shows to give you some great content.