2017 Q1 letter: Renewable energy in the Trump era

Dear Friends,

The first quarter of 2017 was full of eventful news for markets. We saw a Fed rate hike, record low unemployment rates, all time highs for US equity markets and a new administration sworn in, with Republicans now in full control of Congress. In our view, this likely marks an inflection point for the current business cycle and market levels.

Since the election, we have received several queries from our socially responsible investors about the fate of environmental and climate change regulation under the Trump administration. We understand and share many of their concerns. We hasten to add, however, that infrastructure spending and projects are usually undertaken with long time frames in mind. Enterprises making decisions about what kind of power plants to build will consider the costs over a long term. They are well aware that the current administration and its policies are not set in stone.

We do not expect a raft of coal plants to be built over the next four years — in fact, 2017 has seen an acceleration of the closure of several legacy coal plants. Large plants typically take 3-5 years to build and operators have to factor in the possibility that they will face a changed regulatory environment just as the plants come online. Natural gas prices are likely to play a much larger role in determining what resource mix generates our electricity. The cost of utility scale renewable solar power continues to fall, and though it is not yet competitive with cheap gas, it is not far off either. The IEA estimated the average capital costs of photovoltaic solar plants under construction to be 35-45% higher than natural gas plants per unit of energy produced. An array of tax credits make solar competitive with gas. though the precise economics are driven by regional factors and weather. Wind and hydroelectric power are already competitive with natural gas.

At the risk of appearing sanguine, we think that technological advances, consumer preferences, and the economics of scale have brought us to the point where renewable energy will be competitive with conventional electricity generation going forward. Installed renewable capacity will continue to increase, with or without incentives. If fuel costs move higher, renewables will be become very attractive.

In our view, purchasing certain sectors based on the administration’s stated policy preferences is unlikely to lead to consistent gains. Our reasoning is based on the Trump administration’s penchant for changing direction at the drop of a hat, and secondly on the opposition to various aspects of their policy agenda from either side of the aisle in Congress. In the medium and long-term, valuations and the business cycle will determine investor success. Neither looks particularly fortuitous at the moment for risk assets (equities, or long-term/lower-quality bonds). We continue to recommend a defensive shift for clients based on these factors.


Subir Grewal, CFA, CFP Louis Berger

Q4 2016 letter

posted in: Events, Markets, Quarterly Letters | 0

Dear Friends,

We hope you have had a good start to the New Year and wish you the best for 2017. As always, in our first letter of the year we have attached a review our 2016 investment themes and a list of our investment themes for 2017.

The fourth quarter of 2016 revolved around politics, with a focus on the US presidential election. In Jan 2016, we wrote there was a “strong possibility one or both major party nominees will be from outside the establishment mainstream”. In retrospect, that looks like an understatement. A series of unusual news stories and the eventual surprising result of the US presidential election led to sharp drops in US equities in early November. Markets recovered quickly and ended the year close to or at their highs. In some ways this is a relief rally, driven by the realization that much of the Republican establishment will support the Trump administration and vice-versa.

The political upheavals of the past few months have not changed the underlying economic realities confronting investors. We are likely at the tail end of a bull-market that is almost 8 years old, and several risks loom on the horizon. Interest rates in the US will continue to rise as the Fed attempts to normalize historically low borrowing rates. This will modify the calculus for investors as interest bearing assets become attractive and rising rates impact the denominator in equity valuations.

The results of the US election have created enormous uncertainty about the US’s future economic policies, particularly with respect to trade. We believe that workers’ concerns about economic insecurity do require political solutions. We are not, however, convinced that protectionist barriers are the answer to job-losses in the US manufacturing sector (the last US experiment with high tariffs, 1930’s Smoot-Hawley Act, likely exacerbated the effects of the Great Depression). Nor do we believe it is in the US’s long-term interests to loosen environmental rules. The incoming administration seems bent on trying or threatening one or both of these approaches.

Roughly 50% of sales for S&P500 companies occur overseas. This underscores the global nature of the world we live in, and the degree to which US businesses rely on foreign operations. The prospect of a full-fledged trade war with major regions or countries should worry investors deeply. Though some investors may have been emboldened by the November/December recovery, we would advise caution given the significant headwinds and uncertainties facing us.

As always, we have published our investment themes for the upcoming year and reviewed our themes for 2016.



Subir Grewal, CFA, CFP                                                        Louis Berger

2017 Themes: The Doldrums

  1. Fed stays the course: We expect the Federal Reserve will continue to raise rates as stated. We expect the Fed-Funds rate to rise above 1.5% over the course of 2017.
  1. Equities Caution: We continue to be cautious on US equities, as we have been for the past several years. S&P 500 is priced at over 25 times last-year’s earnings. Even if we use projections that forecast a recovery in energy sector prices, P/E ratios are over 20. Rising rates erode support for outsized price-earnings ratios. We are also in the eighth year of a long bull market with a number of credit related issues in markets across the world. We continue to advocate for a cautious allocation to stocks and expect to see negative returns for US equities this year.
  1. Artificial Intelligence: Technology continues to come at us hard and fast, but the groundwork has been around for decades. We recall using voice-recognition software to dictate texts almost 20 years ago. It was slow and cumbersome. Modern voice recognition is vastly improved by faster hardware and refined software. When coupled with the ability to search for information and issue instructions to connected devices, this technology can seem very much like science fiction, evoking both fears and dreams. Yet, asking Alexa to lower your blinds is in essence no different than using “the clapper” to turn on the lights. We expect this to be the year that voice activated instructions come to various devices, including cars and household appliances. Companies with effective voice activated solutions will find themselves partnering with manufacturers of all sorts of devices, not simply computer and phone makers. The revenue and earnings implications are less clear. Licensing fees may not amount to much and a large part of the value for technology companies may derive from sales of media and in Amazon’s case, all sorts of goods. We expect performance for companies providing intelligence features in devices to outpace the consumer durables index over the next three years, we will evaluate ourselves annually on this call.
  1. Continental shifts: For much of human history Asia has been the center of the global economy. That changed in the centuries following the European industrial revolution and colonial expansion. Over the past thirty years, rapid growth in China has brought gross East/South Asian annual GDP (ex-Russia) to roughly 25 Trillion USD. This exceeds both that of North America and Europe/Central Asia, both around 20 Trillion USD. The big laggard in Asia has been India, where per capita GDP is 20% that of China. We expect India’s growth rate to exceed that of China’s for the next several years, with the relative difference in per capita GDP falling. Despite the numerous hurdles to doing business in India, we expect investors will begin to pay more attention to companies with exposure to India and an India related strategy. Over the next several years, we expect Indian markets to outperform those in China and the developed world.
  1. European upheavals: This will be a busy year of European politics, there are major elections in France and Germany. Looming over it all is last year’s British decision to exit the Europe zone. Any or all of these have the capacity to inject more policy uncertainty and create market upheavals. Though we believe European stocks to be more attractively priced than US equities, these concerns give us pause. Nevertheless, we expect European stocks to outperform US equities.
  1. Dollar strength continues: We expect the dollar to remain strong against major currencies worldwide. This impacts the returns dollar-based investors can expect to realize from foreign investments.
  1. Drones are going to be delivering much more than bombs: Many of us have been concerned about the impact of automated weapons on conflicts across the world. This technology raises numerous difficult ethical questions, alongside legal dilemmas. Less attention has been paid to the revolution soon to overtake transport and delivery services of every form. Remote operations and autonomous guiding systems are approaching the point where not just driverless cars, but pilot-less planes, captain-less ships and person-less food delivery are about to become a reality. These technologies are going to create immense disruptions for various work-forces across the aviation, shipping and transport sectors. As with so many other technologies, the armaments industry has led the way. But the long-term impacts on our economy, politics and lives will be driven by the commercial applications of these technologies. We expect companies building these technologies to outperform the freight and shipping transportation companies.
  1. Renewable Utilities: Though the incoming administration is not supportive of renewables, we think renewable utility companies or YieldCos will outperform conventional, fossil-fuel based utility stocks. Despite a high likelihood of loosening EPA standards, we think YieldCos benefit from a newer fleet of power plants and stock prices that haven’t recovered much from the energy crash of 2014/15.
  1. Retail Real-Estate: We believe the retail real estate sector will come under pressure from rising interest rates and a secular shift towards online purchases. We expect real estate companies that own large portfolios of malls and brick and mortar stores to underperform other real estate investments.
  1. Optimism about Trump presidency short-lived: We expect any investor-optimism surrounding the Trump presidency to evaporate rather quickly in 2017 as markets find he is unable to follow through on his lofty campaign promises.

2016 investment themes reviewed: “An Uphill Battle”

posted in: Markets | 1

This was a difficult year for our prognostications. We were wrong (or early) on core calls including rising interest rates and an equities bear market, that undercut many other themes that relied on those predictions. Our score was 3.5 out of 10.

  1. × Fed stays the course: We expect short term rates to rise by 1% over 2016, and believe long-term rate rises will be roughly commensurate. We believe the Fed’s board will stick with their stated intentions, it would require dramatic events to make them change course during an election year. As we expected, the Fed was cautious in an election year. Our expectation that the board of governors would vote for a series of quick rises early in the year was wrong, the Fed chose inaction during the election year.
  1. × A return to risk: We believe risk concerns will weigh on markets all year… US equities markets will be down for the year, with a strong possibility that we see a decline of 20% or more over the course of the year. Broader US equity markets ended up 10% for the year, and though the S&P 500 saw a decline of over 11% earlier in the year, this wasn’t as much as we were looking for.
  1. ? Oil is red: We expect oil prices to continue to be weak in 2016, oil is likely to see the $20-25 range… Oil bottomed at $26 a barrel and remained below $50 for most of the year, a big departure from the $100 prices in 2014.
  1. ? Emerging markets comeback: We believe smaller emerging market equities will outperform developed markets in North America and Europe which we expect to be stuck in the doldrums during 2016… With total returns of 8.58%, the MSCI Emerging Markets index outperformed most developed markets, except the US (where returns were in the double digits).
  1. ? A Tech-wreck redux: Technology companies have been among the strongest performers over the past few years… However, extremely optimistic valuations for unproven business models have become the norm and we believe the inevitable reckoning is quite likely to occur this year. High profile stocks such as Twitter and LinkedIn suffered large declines this year (LinkedIn was eventually sold), and the Nasdaq composite (7.50%) underperformed the broader S&P500 (11.96%). That said, the broader decline for technology stocks we were expecting did not materialize.
  1. × Commodity economies fumble: Australia and Canada were both spared the worst of the global financial crisis… We believe both will be among the worst performing markets in 2016. Though the Australian market had relatively moderate performance in 2016 (the ASX rose roughly 5%), the Canadian market was one of the best performers (with the TSX up almost 15%).
  1. ? The greenback still rules: We expect upheaval in a number of markets to drive a flight to safety and support USD through 2016. We believe the dollar continues to remain strong in 2016 against Euro and other major currencies. We were right on this call, the dollar has gained over the course of the year, against both the Euro and other major currencies.
  1. × Renewables: We are long-term believers in the prospects of the renewable energy industry and the recently concluded Paris accords should support prices in the sector…We expect renewables to continue outperforming their conventional energy counterparts. We were wrong on this one. Renewable energy companies had moderate to flat performance, with the Nasdaq Clean Edge index ending the year down over 4%, while the S&P Energy index was up over 20% for the year.
  1. ? Presidential election: 2016 is a US presidential election year and an unusual one to boot. We believe the sentiment favors non-traditional candidates who reject the status-quo. There is a strong possibility one or both major party nominees will be from outside the establishment mainstream. In part this reflects a broad decline in deference to the governing class after the financial crisis of 2008 and the decade that preceded it. Recent European elections in France, Hungary and Greece have reflected similar sentiments. If as we suspect, a candidate opposed to the status-quo ends up on a major party ticket, this will create additional uncertainty weighing on markets in 2016. We were right on this call. We thought there was a high likelihood that one of the nominees would be from outside mainstream US politics. We believe there was a low likelihood that a non-traditional candidate would win the election. That outlier scenario was realized.
  1. × Unemployment Rises: We expect headline unemployment in the US to end the year above 5%. The softening in global demand, rising rates (however slight) and lackluster earnings we expect will also impact employment within the US. This is in keeping with our expectations of an economic downturn during 2016. We were wrong on this call, we ended 2016 with unemployment at 4.7%.

India’s demonetization: it’s like pixie-dust for bank balance-sheets

posted in: Markets | 0

20161122_india-rupee-note_article_main_imageMany motives have been advanced for the great Indian demonetization of 2016. These include reducing the informal/untaxed “black-money” economy, removing counterfeit notes from circulation, making terrorist financing more difficult etc. Might there be another, unstated, reason apparent to central bank watchers? A subtle subterfuge to reduce the perceived level of non-performing assets (NPAs) at Indian banks.

By March 2016, Indian banks held 6 Trillion rupees (or 6 lakh crore) in NPAs. This amounted to 7.6% of their aggregate balance sheets as outlined by the RBI in its June 2016 financial stability report, up from 5.1% over six months. That large jump was the result of an Asset Quality Review initiated by the RBI. Indian banks had been using various devices to avoid classifying bad debts as NPAs. The RBI’s re-classification tore down this hall of mirrors. The RBI also projected NPAs could rise to 8.5% by March 2017.
Within two months, Raghuram Rajan had been removed from his post by the present Indian government. Eight weeks after that, Prime Minister Modi announced the shock demonetization of existing Rs. 500 and Rs. 1,000 notes.
Since then, 90% of the demonetized currency notes (14 Trillion rupees) have been deposited into the system. We can reasonably assume the bulk of these funds have remained in the banking system since withdrawal limits are in effect and large cash transactions are being discouraged.
If the denominator for NPA ratios has indeed risen from 79 Trillion rupees to 93 Trillion rupees. gross NPA ratios would fall to 6.4%. Just like that, we have a seemingly magical improvement in the credit quality of bank balance sheets.
Who knew a “digital economy” would have such fringe benefits?
(Also published as a letter by the Financial Times)

What should investors expect if Trump wins?

posted in: Bonds, Commodities, Economics, Energy, FX, Markets, Stocks, USA | 1

First, we think a Trump victory is quite unlikely. That said, the probability is not zero, it’s likely to be around 15-25%. We routinely analyze even less likely events and their impact on markets, so we have considered the reaction of markets if Mr. Trump were to win the general election.

There will be almost no place to hide from the initial volatility after an unexpected Trump victory. We expect significant turmoil in the financial markets and we believe that in the short-term (days/weeks) there will be few safe havens. Mr. Trump’s economic policies are so unconventional, and his temperament so mercurial, that we expect almost all sectors and asset classes to be somewhat affected by negative uncertainty. Precious metals may be the only asset that benefits from a flight to safety.

Bonds have traditionally served as a safe haven in times of turmoil. We believe bond investors should not remain sanguine if Mr. Trump does win the presidency. As a leveraged developer, Mr. Trump has had a colorful and combative history with lenders. His natural bluster has been intermittently aimed at bond markets during this campaign and the prospect of a Trump administration in control of the US Treasury is bound to spook bond investors. He has suggested he would unilaterally default on US sovereign debt (arguably not a novel position since the Republican congress toyed with a similar position in 2011) and seek to renegotiate principal amounts.

Mr. Trump has made combative comments about the Federal Reserve and its current policies. He has also expressed dissatisfaction with the current low interest rate regime. Taken together, these sharp, unusual policy views create immense uncertainty about how Mr. Trump would manage the credit and repayment of US debt, the government’s relationship with the Fed, and other issues of concern to the broader credit markets. We expect FX markets to exhibit a flight to perceived safety which historically has benefited the Swiss Franc and Japanese Yen. Uncertainty about bonds and rates will also hit real assets heavily dependent on credit markets. We do not expect real-estate to do well.

When it comes to stocks, we expect broad declines in the short term, but some sectors will be harder hit than others. The banking and financial sector is likely to see a steep decline in market sentiment and levels. Mr. Trump has made several negative statements about banks and their business models. Banks are also naturally leveraged and very sensitive to market sentiment. None of this augurs well for the banking or financial sectors.

Given Mr. Trump’s combative stance on trade and trade agreements, we would expect sectors dependent on imports/exports in their global supply chain to be battered. This includes consumer discretionary, technology, heavy industry, materials, and depending on precise global footprint, energy companies. In contrast, consumer staples should play their standard defensive role.

The immediate sentiment towards the defense industry is somewhat more uncertain. Mr. Trump has, at times, advocated a combative posture on national security and war matters. In almost direct contradiction, he has also proclaimed he would reduce the defense budget and the number of military bases overseas in line with his “America First” pledge. Defense contractors dependent on Pentagon contracts for services to troops overseas are likely to see sentiment and stock prices decline. Large defense manufacturers should decline as well since Mr. Trump has expressed skepticism about some expensive weapons programs (the F-35 in particular). The foreign policy and defense team Mr. Trump puts in place will determine how this plays out in the longer-term.

Beyond the initial few weeks and months, we expect much will depend on the composition of Mr. Trump’s administration and his demeanor during the transition. A prospective Trump administration caught up in balancing spending, debt, legislative priorities and political considerations would normally be constrained. However, Mr. Trump is likely to have a compliant Congress, with Republican legislative majorities and both Senators and Representatives eager to please the new force in American politics. It is impossible to make longer-range forecasts of what a Trump administration’s policies would look like, simply because we do not know his true priorities. We would advise investors to be extremely cautious about bargain-shopping in the immediate aftermath of a Trump victory.

Mr. Trump is unlikely to win the election, but in the event he did, we believe markets will react very poorly, at least initially. He is in many ways, the opposite of a traditional conservative politician, disdaining societal norms and conventional politics. Mr. Trump’s election would engender policy uncertainty on a scale not seen for decades, upending long-range business plans and reducing risk-appetites across the board. We would advise investors to exercise caution in the event Mr. Trump wins.

If a presidential candidate berates the Fed and no one pays attention, do markets still react?

posted in: Bonds, Markets, Stocks, USA, World | 0

The Federal Reserve chose not to raise rates in September, despite speculation by many participants that they would. The decision went as we expected since the Fed is generally unwilling to move rates this close to a presidential election. As an institution, the Fed is very reluctant to take actions that could be interpreted as favoring one or another party. Absent a genuine crisis (as in 2008), Fed governors will heavily favor inaction in a presidential election year. Inaction in this instance means an expansionary monetary policy with very low rates, and this does indeed benefit the incumbent party. In our view, this is more accidental than deliberate.

For a number of decades, central bankers have walked a fine line. They are political appointees, but their decisions are supposed to be apolitical, and they enjoy a degree of independence not afforded to the heads of other government agencies. Like all senior government officials, Fed governors are politically attuned and they undoubtedly have personal political preferences. In a normal election year, with a more typical slate of candidates, Fed inaction might lead to quiet grumblings within DC circles. But this is not a normal election year.

We have seen Mr. Trump repeatedly attack the Federal Reserve chair, Janet Yellen, in very personal terms for keeping rates low. This has received very little attention among all the other political news and outrageous statements by Mr. Trump in this cycle. As with so many things this year, we cannot say whether or not berating Fed officials will become the political norm.

What we do know is that in most countries, the slightest hint of overt political “interference” in central banking decisions can spook markets. The enormous volatility of the South African Rand over the past year is a case in point. European markets saw similar gyrations during the months leading up to Mario Draghi’s succession of Jean-Claude Trichet.

Though berating the Fed is a small part of Mr. Trump’s political plank, we had to go back to Williams Jennings Bryant’s candidacies of 1896 or 1900 to find an instance where central bankers and monetary policy was dragged into an American political contest in such a way. And that was back when US dollars were backed by gold in a fixed amount. Neither the Nixon administration’s abrogation of the gold standard nor Mr. Volcker’s unremitting steps to control inflation elicited such personal invective. As long as Mr. Trump’s chances of winning the presidency remain slim, the market will remain sanguine. If the prospect of a Trump presidency were to become more likely, we expect the future monetary policy of the US to become an area of immense concern for the markets.

We have discussed interest rates extensively in our previous letters, and would like to briefly turn our attention to debt levels. Extremely high levels of debt were the primary cause of the 2006-2009 financial crisis and generally make for a riskier financial system. Though US households and enterprises continue to reduce debt (deleverage), global debt levels have continued to rise. Looking at World Bank and IMF data, we can see that global private sector credit now exceeds 2008 levels (measured as a percentage of GDP). US private sector debt, at almost two times GDP, remains higher than the global average. Much of the growth in global debt levels has come from China where debt to GDP levels have risen significantly. In 2008, the World Bank pegged Chinese domestic credit at 100% of GDP. By 2015, this had risen to 150%.

Chinese debt has not yet reached extreme levels, but the rate of growth is more extreme than it was in the US between 1994 (when debt was 120% of GDP) and 2008 (when it reached a peak of 206%). Economies linked to China in the Asia-Pacific region (Australia in particular) have seen increases of similar magnitude. Latin America and the Middle East round out the regions where debt loads have increased, but levels remain relatively low, around 60-70% of GDP. China remains the biggest risk, since it has a relatively immature credit market which has seen enormous growth in the past decade.

In the US, equities markets have remained in a tight range for the past three years as consumers chose to reduce debt and forgo spending. The S&P 500 has continued trading between 1800 and 2200 since 2014. This can also be partly attributed to the tail end of the business cycle, with no immediate catalyst for either further growth or a retraction. At this stage, we would expect inflationary concerns to force interest rate hikes, but inflation is low to non-existent as consumers continue to reduce leverage and remain price-conscious. For the Fed, this remains a challenging period, with few answers available in textbooks. That said, we expect the Fed will raise interest rates in December, after the election is safely settled, likely by 0.25%.

Investors face similar uncertainties and we continue to advocate for cautious asset allocation and a focus on defensive companies and sectors.

Brexit and the rise of Populist Isolationism

posted in: Markets | 1


The second quarter of 2016 saw some stabilization in global equities after a very volatile Q1. But this calm was short-lived as the surprise results of the Brexit vote roiled markets in the last weeks of the quarter.

We do not believe the Brexit referendum in itself will have a significant impact on the global investment climate or opportunities for investors. Whether the UK remains within the EU, or exits and reaches an alternate trade agreement with the EU, is of marginal significance to investors, especially those outside of Europe. The initial impact is almost certainly restricted to the UK itself, which may see a political disintegration if Scotland dissolves the union with England and Wales. Peripheral EU countries with significant deficits/debt (Greece, Spain, Portugal, Italy) would see a further erosion in confidence as a large, economically vibrant member leaves the EU. The financial industry in the UK is bound to see some contraction if Britain exits. The large London-based banks employ tens of thousands of workers, many carrying European passports. If the pool of available recruits narrows, banks are likely to expand offices in other cities. Dublin, Frankfurt and Paris are obvious alternatives, Switzerland is another continental (though non-EU) option. An exit will also mean personal data that pertains to EU nationals can no longer be stored or retained in the UK. This will impact technology companies and data-centers, where, as a result, the UK will find its market in those industries contracting as well.

An exit would permit the UK to enter into trade agreements with third (non-EU) countries, including former colonies such as India, with far more freedom than it would enjoy within the EU. After a period of adjustment, we would expect the UK economy to resume whatever long-term trajectory it would otherwise have had given demographic trends. The costs of adjustment if Britain does exit will be extensive. Regulations will need to be re-written, border procedures modified, passports re-issued, and undoubtedly the political costs will be enormous. Bickering over the result is bound to continue for years and indeed decades. But these costs will not continue into perpetuity.

This is not to say Brexit is insignificant. From a political perspective, it is extremely significant. It is yet another important signal that the enormous economic, demographic, environmental and political changes of the past few decades have left large segments of many populations with a sense of discontent and loss. Since the collapse of the Soviet Union, we have seen enormous changes in rapid succession. Technology has disrupted many industries, expanded markets and brought new competitors to formerly isolated corners of the world. Online marketplaces allow distributors to reach virtually every person in an increasingly connected world with ubiquitous network access. It has also led to an increasing concentration of wealth in many parts of the world. Environmental and political upheavals have created a historically high number of refugees fleeing war or lack of opportunity. Urbanization is on the rise virtually everywhere with populations moving to cities in record numbers. Large cities across the world, and their surrounding areas, have become ever more diverse and globally inter-connected. Asia, with its enormous population, has historically been the center of global trade and economic activity. After almost two centuries of relative decline, Asian economies are seeing rapid, sustained growth.

Brexit reminds us that these changes are unwelcome to many. Rural areas across the world, industrial areas in the western world, those with nationalist sentiments, and older populations everywhere see an erosion of all that is familiar and comforting. Every crisis is seen as an indictment of an global elite forcing such changes on a reluctant population. In many ways these political forces are not new. They have always been with us and have simply gathered force as the impact of changes has risen. Every era of change and migration has encountered some degree of resistance; this includes prior periods of urbanization and industrialization across the world. Yet, even in the recent UK referendum, 48% of voters, and large majorities of younger voters, opted for remain.

The broader question for us as investors is whether or not political systems will be able to manage these changes peacefully and with as little disruption to daily activity as possible. Quite clearly, this is not the case in many parts of the world. Our view is that democracies have a better chance of managing such change peacefully. Yet, even in the US, the remarkable strength of an openly nativist and populist candidate such as Trump should serve as a warning. Enormous changes such as those we have seen over the past three decades have to be managed with care lest they alienate large portions of the population. That alienation, if allowed to fester, can create a window of opportunity for disruptive forces to attain power. This would pose a real risk to continued stability and the prosperity and well-being that accrue from it.

Quite apart from the significant political risks ahead, equities markets are at cyclically-high valuations. Bond prices too are at high valuations with interest rates at low levels. In our view, as value oriented investors, we see limited rewards for taking excess risk. Accordingly, we continue to advise clients to maintain a relatively conservative portfolio allocation, keeping in mind their long-term objectives and recommended allocation.




Subir Grewal, CFA                                    Louis Berger

2016 Q1 letter: Negative interest rates cap a rocky quarter


The first quarter of 2016 saw market gyrations far rockier than many prognosticators had expected. A sharp drop in commodities prices and oil in particular sparked fears of a global slow-down and impacted all asset classes. Increased oil production in North America and the prospect of renewed imports from Iran led to expectations of a supply glut. Slowing economies in China, Brazil and Russia along with concern about potential slumps in the EU and US drove demand expectations down. Together, they combined to drive oil below $30 a barrel, causing great distress among the highest cost operators. Producers relying on deep sea projects (Brazil) and hydraulic fracturing (or fracking, in North America) have been among the most severely affected. Many small to mid-sized servicers and production companies are facing possible bankruptcy and have been liquidating assets. This has impacted the high-yield bond market (where many of these companies raised capital) and led to job losses in states where fracking had created small oil booms.

The commodity decline also caused steep retrenchment in various equity markets and drove the Federal Reserve to signal a pause in its plan to raise interest rates to 1% this year. The S&P 500 dropped as much 13% during the quarter and the MSCI Global stock index fell 11%. The S&P 500 has since recovered for the year, along with oil prices. In our view, the concerns that drove the asset market declines have not abated. Global growth continues to be weak and numerous markets are showing the signs of a waning seven year bull market. We would continue to urge caution when investing in risk assets across most markets.

Policy makers in several countries seem to have reached the end of their imagination when it comes to additional market stimulus. About 25% of the global economy now has negative interest rates. That includes the Euro-zone, Japan, Switzerland and Sweden. Banks are now being charged to maintain balances at the central bank. In a number of cases, banks have begun to pass these negative rates on to customers. This is bound to create great consternation. Depositors are not accustomed to being charged interest to maintain deposits. They may be used to seeing fees deducted from checking accounts, but most will be shocked to see savings accounts charged interest. In an environment where banks are already suspect in the eyes of many, this will lead to even more discontent.

From anecdotal evidence, customers have already begun to protest negative rates. We believe there is little sense in keeping rates negative for extended periods of time. In theory, it sounds reasonable to say there should be no zero-bound for rates. But humans are not theoretical creatures. We find being charged to keep our money in a bank rather strange, and customers will develop all sorts of behaviors to avoid this. These include keeping large sums of cash at home and purchasing safe haven non-financial assets (real-estate, precious metals etc.). Such behavior undermines the stated aims of negative rates, i.e. increasing the level of bank lending. The longer we maintain negative rates, the more distortions we introduce into the savings/money markets. In our view, this is not a policy that regulators should maintain for any period of time. It would be far more effective to apply fiscal stimulus in the form of government spending.

While markets have seemingly stabilized after a very volatile start to the year, we expect 2016 will see continued ups and downs with high risk assets remaining vulnerable to a price correction. We think this will present buying opportunities and we will continue to look for good entry points to buy equities we see as undervalued. We expect the market for bonds to remain very challenging for investors since rates are extremely low and corporate credit is deteriorating alongside the dip in global growth.


Subir Grewal                                                                                                 Louis Berger

2015 Q4 letter: Enter risk center stage

posted in: Markets | 0

After almost seven long years at effectively zero interest rates, on December 16th the Federal reserve raised rates 25 basis points and signaled a handful of similar increases to come over the course of the year. This move was not unexpected, and there are numerous caveats and complications since so many unconventional tools have been used over the past seven years. That said, the unequivocal signal is that there has been a “regime change” at the Federal Reserve. We are moving from loose monetary policy to tighter monetary policy. Regardless of whether or not the Fed’s moves actually raise rates across the yield curve or reduce lending, the signal has been received and will have implications for capital markets. For several quarters, we have sought to limit maturities in client bond portfolios in preparation for such a move.

We expect US equity markets to be weighed down heavily by the hikes over the course of 2016. Though 1% may not seem like much, a 1% rise in rates can reduce the present value of a future cash flow stream by over 10%. We also expect significant political and tax-related  uncertainty generated by an unusual election cycle in the US to affect stocks. Clients should expect the same headwinds to impact lower quality bonds as well.

Commodities have had a tough 2015 and we expect this to continue. Though we believe emerging markets (ex-China/Russia) will be one of the better performing assets of 2016, we do not believe this will flow into commodities markets which shall continue to be weighed down by reduced infrastructure build in China and dampened demand in the US and Europe. We have more detailed assessments for the year ahead in our top ten themes for 2016 (attached).

On the personal front, 2015 has been a fruitful year for us from both a personal and business perspective. Subir and Molly welcomed their second daughter, Rosalind into the world in June. We thank all our clients for their trust and confidence in us.





Subir Grewal                                                                                                 Louis Berger


2015 year-end review of themes



Overall, we did well on our call for 2015. We were right on six, half right on three others and had one wrong. In general, the year lived up to our expectations of a low return environment with the anticipated Fed rate hike being the biggest influence.


  1. If not now, when? If not the Fed, who?: We expect the Federal Reserve to raise interest rates in 2015. We expect rates to gradually rise to a 1.0%–1.5% target, which would still be historically low. We were right on this call, but the Fed chose to wait till December to raise rates to 0.50%.Though the Fed has signaled rates will be raised to 1.25-1.50%, we are calling this one half-right.


  1. No one rings a bell at the top of the market: […] we expect major US indexes (S&P 500, Dow Jones, Nasdaq) to finish the year in negative territory. We were mostly right here, two out of the three indices ended down. The S&P500 ended 2014 at 2,059 and 2015 at 2,044; the Dow Jones dropped from 17,823 to 17,425; but the Nasdaq rose from 4,736 to 5,007.


  1. Emerging troubles: Emerging economies will continue to stumble in 2015, this includes resource dependent countries such as Russia and Brazil which have run into roadblocks as energy prices have fallen dramatically. […] We expect emerging market stocks and bonds to underperform developed markets this year. The MSCI Emerging Markets Index ended the year down 17%. The Chinese markets ended the year down over 10%, Brazil was down almost 16%, Russia down over 6%, and India down over 2%.


  1. Commodities weighed down: […] We see commodities finishing the year flat to negative. The Goldman-Sachs Commodities Index ended 2015 down over 30%.


  1. +  The trouble with oil: We do not expect oil prices to substantially recover in 2015. […] We expect brent crude prices to remain under $60 by year’s end. Brent crude started the year around $57 and ended 2015 around $37.


  1. Playing defense: For US equities, we believe defensive sectors, including healthcare and utilities will outperform others over the course of 2015. In any sort of correction, we expect enterprises providing essential goods and services to maintain profitability and revenues. Over-levered companies that have benefitted from speculative euphoria in recent years are particularly vulnerable to sell-offs in our view. We were half right on this call as healthcare outperformed the S&P 500 Index in 2015 (S&P Healthcare Index +5.8%) while utilities lagged (S&P Utilities Index -7.9%).


  1. + Euro Crisis, back to the future: […] Depending on outcomes, another round of brinksmanship will likely begin between Greek politicians, the markets and EU officials. Over the past few years, attitudes have hardened and we believe there is a real chance that Greece may be forced to, or choose to leave the Euro. Over the course of the year, we saw another round of concerns about Greece that led to weeks of tense negotiation. The Euro ended the year down about 10% against USD (from 1.20 to 1.07) partly s a result of continued concern about the longer-term prospects for the Euro-zone. Though economic issues have faded from view as a continuing refugee crisis absorbs headlines, we do not believe the Euro-zones strategic challenges have been dealt with.


  1. + Junk bonds get kicked to the curb. […] With rates rebounding (even marginally), we believe investors will find the reward that comes with high yield bonds no longer worth the risk.  We were correct on this call as high yield bonds suffered their first down year since 2008.  The Barclays High Yield Bond Index was -6.77% for 2015.


  1. × Growth in Renewables: […] With oil prices falling again, we’ve seen many renewable stocks follow suit, as sort of a knee jerk reaction by investors. We think this provides a tremendous buying opportunity, particularly in the YieldCo space where, like utilities, companies own a portfolio of newly constructed power projects with long term power purchasing agreements in place.  We believe we’re a bit early on this call, but for year-end list-scoring purposes we were wrong.  Renewable energy stocks had a negative return for 2015 impacted by falling prices for conventional energy. Renewables did however, outperform traditional fossil fuel energy stocks.  The Nasdaq Clean Edge Green Energy Index was -6.21% while the S&P 500 Energy Index finished -21.12%.


  1. The Russian question: […] We are bearish on Russia and expect the Russian market to underperform in 2015. The Russian market ended the year down 6%.


Q3 letter: China and Rates driving the market

In our last letter, we stressed how economic turmoil in China could have far-reaching implications for the global economy.  Much of the past quarter’s market activity has been driven by this concern as global risk assets sold off in response to persistently weak data out of China.

We continue to view events in China as a top risk factor going forward despite aggressive attempts by Chinese authorities to prop up stocks and assure investors that markets are stabilized.  Much of the onshore Chinese market remains suspended and economic data points to substantial weakness. Stocks on the on-shore Shanghai exchange are about 30% overvalued when compared with the same securities trading in Hong Kong. Reports and analysis suggests the Chinese government continues to intervene in the market on a daily basis through its agencies and state owned enterprises. Restrictions on stock sales are still in place for many participants including company officers. The credit markets have grown significantly over the past few years, with private sector debt now at 227% of GDP (it was 116% in 2007). Most of this debt is related to real-estate in one form or another. In comparison, private sector debt in the US is roughly 180%. A rise in rates or the inability to roll over debt, would cause a significant shock to China’s private sector enterprises. Public sector debt levels appear more manageable, at 55% compared to 89% for the US. However, local governments are heavily reliant on off-balance sheet financing to fund infrastructure projects. If these vehicles were to fail and had to be bailed out, government debt could balloon to reach US levels. Given the Chinese market’s size, uncertainty in credit and equities markets has begun to affect perception of other emerging economies and has continued to depress commodity prices (where Chinese demand had once been the major growth driver).

Partly in response to these concerns, in September, the Federal Reserve chose not to raise interest rates (there was one dissenting vote). US stocks, which in previous years had rallied on dovish news from the Fed, reversed and sold off as market participants became spooked by Janet Yellen’s relatively gloomy press conference.  Most market participants had expected a rate rise and the Fed’s failure to deliver gave investors pause.

Despite some recent weaker-than-expected US employment data, we think it remains likely the Fed will raise interest rates at some point this quarter (possibly in November). Rates have been held steady below 0.25% for nearly 7 years now and the case for a punctuated normalization of rates grows stronger every month. We do not see room for meaningful raises next year as we would be in the middle of an election cycle (in an effort to remain non-partisan, the Fed prefers not to make major policy moves during election years). The Fed notes that levels of inflation are the biggest argument against raising rates and stubborn low inflation could potentially be a reason for them not to raise.

US equities markets remain approx 5% below the highs realized earlier this year and, despite an early October rally, we believe risks remain prevalent. We continue to urge US-based investors to maintain cautious allocations as valuations remain at cyclical highs and neither the business cycle nor the current interest rate environment are conducive to high risk investments in stocks or bonds.

While we think playing defense is prudent in this environment, increased volatility can often mean mispriced assets and buying opportunities, especially when sentiment turns negative and investors aggressively sell.  We will continue to closely monitor market moves and look to buy quality companies if they are sold indiscriminately.

As we are approaching the year-end, we remind clients to keep in mind calendar-year deadlines for 401k and retirement plan contributions. It may also be appropriate to review capital gains realized this year and discuss implications with tax advisors. As always, we would be happy to be part of the conversation.




Subir Grewal                                                                                                 Louis Berger

Chinese police haul in investment managers to probe “market volatility”

posted in: Bonds, China, Economics, Markets, Stocks, World | 0

Over the course of this week, every move in global markets has been ascribed to “fear about China”. But it’s pretty clear that most of the media does not really understand what is happening in Chinese “markets” and the Chinese economy.

Markets are closed in China today and tomorrow, while Hong Kong will be open on Friday. On Wednesday, Chinese markets were down more than 4%, but came back to close about flat. Many observers assumed this was because state entities had been told to buy ahead of the big military parade to mark the 70th anniversary of V-J day (15-20 million Chinese people were killed in WW-II).

The biggest financial issues in China are related to local government debt (think municipal debt) and its rapid growth. Local governments have been on a debt issuing spree for years, which is necessary since they have limited taxing authority. Their revenues come from borrowing and selling land to real-estate developers. Those sales are complete with kickbacks and evictions of long-time residents. The problem is, real-estate development has dropped off a cliff so they aren’t buying land anymore. And this week, the Chinese authorities announced they would limit how much local governments can borrow this year (they’ve been talking about limits for three years and set some last year). That means local government revenues and spending are about to fall off a cliff as well.

The best commentary on Chinese credit markets comes from Michael Pettis. His latest post is: If we don’t understand both sides of China’s balance sheet, we understand neither.

But the stock market is what interests most people. So, here’s a scary fact about Chinese stocks. A number of Chinese companies trade on both the Shanghai stock exchange (on-shore A shares) and in Hong Kong (off-shore H shares). Their prices in Shanghai are, on average, 115% higher than the prices in Hong Kong. The shares represent the exact same economic interest in the exact same enterprise. Part of the reason is that so many Chinese stocks have suspended trading. Part of it is that China banned stock sales by major shareholders and executives for six months (through 2015). At one point in July, stock brokerage firms in China were instructed by the authorities not to accept any sell orders.

Whatever the Shanghai stock exchange is, it is definitely not a “market” in the sense that buyers and sellers meet and freely trade there. Hong Kong is much closer to a free market, which means if you believe HK prices are correct, Shanghai should another 50%. There are some “free-market” types who (mistakenly) think the H-share discount represents a “bargain” rather than reality. Or it may mean Rmb has a lot further to fall.

Yesterday, there were reports that Chinese regulators have called in numerous heads of investment management companies in an attempt to probe “market volatility”. Rumors are flying around about forcible detentions, in particular there are numerous stories about the Chinese head of the world’s largest fund of hedge funds, Man Group.

Li’s mobile phone was turned off when called on Monday. Chaoyong Wang, Li’s husband, said in a telephone interview that she is in a meeting with “relevant industry authorities” and he doesn’t know who they are. He said he spoke to her by telephone yesterday and today, expects her back home soon but does not know when.

Someone, somewhere is probably thinking, “I wish they were arresting hedge fund types here”. Remember, this is China. One senior manager told a colleague “If I don’t come back, look after my wife” as he left the office in response to a summons from the authorities.

It’s been an open secret that Chinese economic data, on unemployment, GDP and industrial activity is, shall we say heavily massaged. Lots of market participants have joked about this amongst themselves, but the implications are now being debated more seriously. I’ll let Chris Balding cover some of the more egregious issues:

No less than the second in command of China, the Premier Li Keqiang, has stated that Chinese GDP data is unreliable and “man-made”.  To put this in perspective, thecurrent Premier of China, second in command for the entire country, leading economic policy formulation, a Phd in economics, having spent essentially all his career inside public administration in various posts throughout China advises you not to trust GDP figures…

For more than a decade, Chinese unemployment spent most of its time bouncing between 4-4.2%.  Chinese economists became skeptical of the number and conducted a study estimating urban unemployment during their sample period reached 10.9%.

China has undoubtedly grown significantly over the long run and this is unquestionably good for China and the world. However, that is not the question.  The question is how reliable are Chinese GDP figures.  I believe as a baseline case from my own research alone, real Chinese GDP would need to revised downward by a minimum of 10% or approximately $1 trillion USD.  Add in other known problems and I believe the number could go as high as a downward revision of 30% of real GDP.  Think of it using a simple scenario, let’s assume every year since 2000 China has overstated GDP by 1%.  In other words, 10% is in reality 9%.  That would imply that today, China needs to revise current real GDP downwards by approximately 16%.  This would still mean that China has grown significantly but also, as a mountain of clear evidence indicates, Chinese GDP growth has been overstated. Finally, it is important to note that lots of little numbers are clearly off but all these little numbers add up to big changes especially when added up over time.

Compound interest can work against you folks.

A number of people are saying: All eyes on Chinese markets on Monday.

Dead Cat Bounce: Intra-day swing of 700 Dow points, ending down 200

posted in: Asia, China, Euro Zone, Stocks, USA | 0
Futures this morning were up over 500 points, most of the trading during the day was above the 16,000 level between 250 and 400 points up. But we’ve closed at 15,666, the lows of the day.

Though yesterday’s numbers were eye-popping, today is arguably going to create more jitters. Big intra-day swings that end on lows scare traders. Though China and Japan were down, most of Europe and Asia was up. So the stage was set for an uptick in the US. Which reminds me of the senior equities trader who once told me “Europe does nothing at all till 1pm when the Americans come in to set the tune”. The negative close means the three largest markets, China, Japan and the US closed down today.

There’s the inevitable talk of painting the close. And there is the competing view that the morning session was just a dead cat bounce.

The real story is that Chinese over-investment in infrastructure and capital goods is grinding to a halt (they’ve built more roads, rails and apartments than they need). It’s all fueled by large increases in borrowing which is what causes most bubbles. Given the size of the Chinese economy, this has had an impact on resource prices (who is going to use all that oil and iron). At the margins, this will impact US businesses, especially the global behemoths. There are some parallels to the US situation in 1928, also coming at the end of a period of extensive capital investment (also in railroads) and when the US was emerging as a major economic powerhouse.

The backdrop is that US stocks are at cyclically high valuations, at least as measured by longer-term ratios like CAPE. This coupled with a 7 year long rally means a lot of people are rightfully wondering whether stocks can go higher.

As an aside, over 80% of stocks on the Shanghai exchange were untradable yesterday. Many of them because they hit the daily limit of a 10% fall in prices, the rest are suspended at the request of company management.

The real risk is China, not Greece – 2015 Q2 Letter

Two inflection points long in the making appear to have arrived simultaneously over the past few weeks. In Europe, negotiations between Greece and Euro-zone countries that have lent to Greece appear to have broken down; and in China, the stock market has taken a remarkable tumble. In itself, the Shanghai market’s steep fall is not surprising or remarkable (this was a market which had risen 150% over the previous year), but it is interesting in terms of what it portends for other markets and factors in China.

The various actors in the Greek/Euro crisis have indulged in brinksmanship for a number of years. The ECB, Euro-zone countries and the Greek government have stumbled from one crisis to the next, taking action only when forced to do so. And when they have acted, the result is to defer rather than reach resolution. It is clear to us that no final resolution of Greece’s sovereign debts can be made without some debt relief. The Greek economy has shrunk enormously under the weight of uncertainty and austerity policies. None of the modeled targets for growth have been met and Greece’s debts are now a larger multiple of Greek GDP (180%) than ever before, largely because of the sharp decline in GDP. A sudden growth spurt may solve that, but given high unemployment, it is difficult to see that materializing without some level of debt relief to lower the amount of the outstanding loans and interest payments. In reality, the only thing that has been achieved thus far is that Greek loans have been moved from the balance sheets of European banks to the balance sheets of European nations. European (and international) banks that lent to Greece, knowing the risks, were bailed out. There has been no such deliverance for Greece itself, and, despite frantic 11th hour negotiations, we do not expect one in the coming days.

A crucial factor that has made the crisis much worse for ordinary individuals in Greece is the absence of a pan-European deposit guarantee scheme. Bank customers in the US have enjoyed a federal guarantee for their deposits since the 1930s. This guarantee currently applies to the first $250,000 on deposit at an FDIC covered institution and has been the primary reason the US has avoided widespread bank runs by retail customers for the past 80 years. In contrast, deposit guarantees and guarantee funds in Europe are run at the member state level. So Greece guarantees the deposits in its banks up to 100,000 Euros. Of course, Greece (unlike the US federal government) has no ability to actually print Euros on demand. That means most bank customers treat its deposit insurance with justified skepticism. Greek banks too cannot count on the European Central Bank to lend to them freely in a crisis. There is an emergency lending facility, but it works through the member state central banks and let’s just say relations between Greece and the ECB are not exactly amicable at the moment.

These two factors taken together explain the phenomenon of Greek pensioners queuing for hours to withdraw the maximum amount permitted from their bank accounts each day (60 Euros). They do not trust the funds will be covered by deposit guarantees and Greek banks are limiting withdrawals, afraid they will run out of Euros.

As a study in contrasts, we have Puerto Rico, which is facing a similar government debt crisis, largely brought on by similar factors (mismanagement, misstatement of financial data, etc.). Yet, the impact is limited to the government’s ability to issue more debt and the value of its bonds. Puerto Rico’s bank will face no runs and will continue to function even if the government runs out of money. They are regulated and insured at the federal level. So, though Puerto Rico’s debt crisis is very serious, and will likely require some level of write downs, its banking system continues to hum along and is not at risk. If the European Union had a similar bank deposit guarantee system, we believe the Greek crisis would not have been as severe.

Lastly, what makes the Greek case significant and holds the market’s attention is not the size of Greece’s debts, which at around 300Bn are large, but not enormous. A 30% write-down of those debts would be 100Bn, some individual banks took write-downs in the 30-70Bn range during the financial crisis. Clearly Greek creditors (EU countries for the most part) could survive a 30% write-down.

What concerns the markets is that the Greek crisis lays bare an uncomfortable truth. The European Union is both unable, and unwilling to act decisively or with coordination in a crisis. The reasons are myriad, but to us, it has been particularly striking to hear World War I and II era rivalries and events repeatedly invoked by some commentators and even senior politicians. A skeptical observer might say that the institutions created to avoid the recurrence of war on the European continent seem to be hell-bent on re-living them. In contrast, though, we in the United States have had the traumatic experience of reliving civil war-era animosities over the past few weeks, those fervently invoking a North/South divide are firmly in the fringe and have been for at least a century. The same cannot be said of Europe.

We have been wary of asset prices and debt burdens within China for a number of years. Some of those concerns have bubbled to the surface in the last few weeks as the Chinese domestic market has endured a series of dramatic losses with many stocks hitting their down limits and several have halted trading entirely. Companies can also ask to suspend their own shares and many have. Most observers have expected such a crash since the on-shore Shanghai market has risen over 75% this year. What was underappreciated is how much of this rise has been driven by large numbers of first-time retail investors, many of them buying stock on margin (borrowed money). The conditions appear to resemble the state of the US market on the eve of the 1929 and 2000 stock market crashes. In certain ways, there are broader parallels with 1929. China is at roughly the same stage of relative development with the US that the US was to the UK in 1929. China has also seen massive investment in capital infrastructure with declining returns, not unlike the US investment in railroads in the 20s. Lastly, there are large quantities of questionable loans on the books at Chinese banks. Taken together, this story is much bigger and could have much wider repercussions than that just a few down days in a large emerging market.

The final consideration is political. Though there is a lot of tittering at the prospect of the Communist party attempting to support the stock market, this is driven by legitimate fears of political unrest if a severe downturn were to materialize. Coupled with factionalism within the party, such a downturn could make for a very volatile period in China, politically speaking. The impact is likely to be felt across commodity sectors (where China remains a major consumer), and a risk of contagion to other markets. In the short term, we expect the US markets will be seen as a relative safe haven. Though clearly, as one of the three largest economies in the world, any Chinese downturn will affect global market values.

On balance, we view the bursting of the Chinese equity bubble and antecedent effects as more significant than the Greek debt crisis. In terms of wealth impact, they certainly are — the Chinese stock market has lost over $3Tn over the past few weeks. That is ten times the amount of outstanding Greek debt. Margin balances owed by Chinese investors are larger than Greek debt. The real concern, though, is that the stock market bubble in its rise and fall, may lead to a bigger reckoning of Chinese financial institutions which are holding real-estate and provincial debt. As the real-estate sector has slowed, demand for land, which constituted a crucial source of funding for Chinese provinces, has dried up. Both real-estate developers and Chinese provincial government debts are looking very weak and they are widely held by Chinese banks and investors.

In general, we recommend appropriate caution for investors. Though the US markets may appear to be isolated from events in Europe and China, and might even benefit from some short-term “flight to safety”, they will eventually be impacted, and current valuations stateside do not bode well for that reckoning.

We continue to believe that investors will be well served to reduce exposure to risk assets in their portfolios and move some money into short term bonds and cash while awaiting a better buying opportunity.

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