Debra J. Diamond's  Instablog

Here’s a quick run down of the more interesting points.

According to Greymount, an institutional investor, the risk premium for stocks for the last 30 years has been 8%. They believe this will be 1% going forward and that portfolios should therefore be positioned 50% fixed income, 50% equity. You need to be ‘more nimble, more active and more tactical to prosper in the future.”

One speaker noted that the stimulus package won’t work because we didn’t co-ordinate it with everyone else.

Spring Creek Advisors is concerned about weakness in the economy, the capital gains rate, inflation. government regulation and how to protect against it. How to play the inflation theme? TIPS,  (not tax efficient) real assets, commodities, distressed assets and portfolios and emerging markets.

Jim Crystal, CIO of Rockefeller and Co is more constructive on growth in Asia than elsewhere, recommends keeping the duration short on fixed income and sees opportunities in dislocated credit. Due to dislocation of assets, new opportunities are cropping up but most consultants don’t know what box to put them in. In a sense, they are retarding the adoption of potentially profitable investment ideas. (My thoughts not Jim’s).

Perhaps the most refreshing and interesting speaker was Richard Masino who is managing his own family office, is ‘not interested in managers who say they have a mandate’ and is seeking managers with ‘mental flexibility’ as opposed to ‘rigid conviction’ He cautioned to beware of ‘trap doors’ which he identified as data mining. It was good to hear an investor tell it like it is rather than buy into the institutional party line.

One opinion on what will work was expressed by the panel on asset allocation. There was some feeling that debt - floating not fixed, senior secured and short term collateral will be attractive.

In terms of the real estate market, there are currently buyers for distressed properties but they’re buying the debt and looking for returns of 25%+ and can afford to be greedy. Land seems to be bottoming out in California and most of the land sales are FDIC for 10-20 cents on the dollar. The FDIC will not ‘force banks to sell’ because they can’t afford to. They have 85 more banks to take over this year and have only taken over 45. Watch for the announcements on Fridays!

According to Paul Green, there are analogies between emerging markets and equities.i.e. country picking vs. stock picking, overvalued countries vs overvalued stocks, - based on fundamentals.  More institutional investors are recognizing the opportunities in fixed income in emerging markets. While it’s typically been viewed as a roller coaster ride full of risks, some trustees are going into bond investing as they feel more comfortable that countries will pay off their sovereigm debt first because they have to come back to market.

Emerging markets will be over 50% of world GDP in 10 years. Most institutional investors have allocations of 2-3% which doesn’t match where the markets are going, Asia ex- Japan was10% of local GDP in 2003 and now it’s 17%. One of the speakers pointed out that you can buy a 20’x20’x20’ bar of gold or all of emerging Asia’s market cap. It’s a $6 trillion trade.

McDonald's are open 24/7 in China and have home delivery. In one week, 500,000 people in China opened up brokerage accounts. The growth of the middle class in China almost makes up for other  macro economic issues.  Chinese consumption will make up 20% of all global consumption in 20 years.

At least 160 countries in the world are emerging markets. Legal systems in emerging markets have become more sophisticated in the last 10 years.

Gold was discussed. 70% of gold mined is for jewelry and 10% is for industrial use. While investment demand has been strong, the weakness in other markets has impacted the price of gold. Longer term, it’s felt that the impact of the Asian central bank allocations will have a major (positive) impact on the price of gold as will the dearth of major new discoveries.

Another compelling speaker was Candice Beaumont, Managing Director of a family office who opined that commodities and energy would outperform all other asset classes for the next 5-10 years. Her office’s investment ability has been uncanny, starting with the call that oil was undervalued at $10 when everyone was calling for it to go to $5.

Overall, investors seemed by and large directionless, still shellshocked and dispirited. The investment business better come up with something better than directionless to get the ball rolling again.

There are several scenarios.

1.Start son of TARP and have it take out Tarp.

2.Sell ourselves to another country. Any takers? They'd have to do a restructuring. 

3.Start a new model- perhaps a new currency or a reverse split on the dollar?

Take America public. Sell our assets( beyond Treasuries) to foreign governments to retire or reduce the debt.

Do these sound ridiculous? In order to balance the budget, revenues have to grow much quicker than expenses. Can this happen naturally? It can't, which is why taxes have only one way to go- up -  the only way to make the top line grow significantly.

By 2019 the US national debt will be $23.2 trillion, approximately 100% of GDP. The US is on track to go bankrupt within the next 10 years.

Since our job is to identify change and position ourselves in front of it, we can turn all of this to our advantage.

Among countries and regions that are expected to be economically sound in the next decade are China, Russia, Middle East and Canada. How can we benefit from their fiscal responsibility?

Global debt sales from Asia are surging.  We suggest keeping your eye on this market. It looks attractive, if early. We like the combination of the currency play, the upside participation through converts and the strength of those economies. For now, we would stick strictly to short term maturities. Continue to buy currencies of Asian economies. Short the dollar. One option is the Pro Shares Ultra Short 20 year Treasury Fund (TBT).