Vous êtes sur la page 1sur 22

The Gloom, Boom & Doom Report



A More Promising Future for Active Managers

“The correlations are breaking down, and that may mean the
trend … is overextended.”

Ned Davis Research

“We are in the late phases of a passive index bubble. I think

over the next five years, there will be a great opportunity for
active managers to outperform passive managers.”

Ned Davis Research 

“You can say active managers have become less active over

Martijn Cremers

“Invest in good companies, don’t use leverage, invest in

liquid investments, don’t do private deals, and light a candle
and pray for a positive outcome.”

Leon Cooperman

“The secret of success in life is for a man to be ready for his

opportunity when it comes.”

Benjamin Disraeli

“The line between failure and success is so fine that we

scarcely know when we pass it: so fine that we are often on
the line and do not know it.”

Elbert Hubbard

“Self-discipline is the ability to get yourself to take action

regardless of your emotional state.”

Steve Pavlina
“Often the difference between a successful man and a
failure is not one’s better abilities or ideas but the courage
that one has to bet on his ideas, to take a calculated risk —
and act.”

Maxwell Maltz 

“Six essential qualities that are the key to success: sincerity,

personal integrity, humility, courtesy, wisdom, charity.”

William Menninger

INTRODUCTION Table 1. In retrospect, I wish I had him since the 1980s, I can say that
invested all my money with Richard. this is not the case. However, he is
I recently attended a meeting of Overlook implements a highly extraordinarily disciplined, focused,
the advisory board of the Overlook disciplined investment process, the so- and honest. (The psychiatrist William
Partners Fund in Hong Kong. Richard called Overlook Model, whose success Menninger wrote: “Six essential
Lawrence Jr. founded Overlook is exemplified by Overlook’s 9.31 qualities that are the key to success:
Investments Limited (“Overlook”) percentage points of outperformance per sincerity, personal integrity, humility,
in 1991 and for a while leased a tiny year against its benchmark over 25-plus courtesy, wisdom, charity.”) These
cubicle in my Hong Kong office. years (see Figure 1). qualities distinguish Richard from
In 1992, Overlook established the Being a long-only fund, Overlook most other fund managers.
Overlook Partners Fund, L.P. (“the also had some big draw-downs. Its According to Overlook, its focused
fund”), a Cayman Islands exempted performance suffered badly during the approach to investing has been a
limited partnership, to invest in public Asian Financial Crisis of 1997/1998 major contributor to its success and is
equity markets throughout Asia, and the Global Financial Crisis of based upon the following principles:
excluding Japan. In 2016, Overlook 2007/2008, but after each event the • one fund and one co-investment
established Overlook 3G Investments, fund always bounced back strongly fund (no side accounts or special
L.P., a single-purpose investment (see Figure 2). deals);
partnership, to invest in shares of Given that Overlook has • one asset class;
China Yangtze Power Company Ltd. outperformed its benchmark by 9.31% • one investment philosophy;
Today, Overlook manages more per year over 25-plus years, one might • focused portfolio with 20–22
than US$4 billion in net assets. The be tempted to think that Richard holdings;
partnership’s successful 24-year history Lawrence is a genius. Having known • a small team incentivized by
is based on consistent execution of the
Overlook Model.
When Richard moved into my
Table 1 Compound Annual Returns of Overlook Partners Fund since
office in 1991, I had known him
for a number of years during which
he had worked as an analyst with
an investment company in Hong
Kong. If I recall well, he established
Overlook with US$10 million under
management, which he had raised
from former associates and some
friends. I believe I also invested
US$50,000 or US$100,000 with
him at the time, an investment I
liquidated before the Asian Financial
Crisis. About 10 years ago, I invested
US$300,000 in the Overlook Partners
Fund. These funds have since grown
to over US$1.3 million. Overlook’s
superior time-weighted and capital- Source: Overlook Partners Fund
weighted performance is visible from

2 The Gloom, Boom & Doom Report May 2017

long-term performance of the fund.
Figure 1 Overlook’s Performance Relative to MSCI Asia Index,
(Richard worked for more than a year
with a lawyer to structure an optimal
compensation and incentive plan that
would gradually reduce his ownership
in the partnership and allow his team
members to acquire a significant share
in the business.) As far as I know,
all his leading employees have most
of the money that they earned from
generous bonuses invested in the
fund. (Conflicts of interest are avoided
by not allowing employees to trade in
Asia.) Therefore, his team’s interests
are almost 100% aligned with their
clients’ interests.
Other factors that have contributed
to Overlook’s superior performance
include the following:
• The growth of assets under
Source: Overlook Partners Fund management is controlled. Every year,
the existing investors are offered an
opportunity to increase their exposure
to the fund by 10% (if I recall
correctly). The idea is to avoid having
Figure 2 Actual Performance of Overlook, 1991–2017
money gushing into the fund after it
has performed well, or flowing out
of the fund in a bear market after the
fund has declined in value. Overlook’s
stated objective is to measure success
by capital-weighted returns. (The fund
has had US$3.3 billion of profits since
its inception.) Overlook’s control of
growth of assets under management
resembles a dollar cost averaging
investment program, whereby an
investor purchases annually the
shares of company ABC with a
predetermined and equal amount of
money. After significant declines in
the stock of ABC, the investor can
buy far more shares; whereas after
sharp price increases in the stock, the
Source: Overlook Partners Fund investor will only be able to purchase a
small amount of shares. (I believe that
the dollar cost averaging investment
program is more suited to investing in
long-term compensation; and essence, Overlook has a single boss: a basket of stocks — say, an index — or
• the benefits of Overlook stay The Overlook Partners Fund, L.P. a fund, than in a single company.)
within the four walls of Overlook. • Overlook does not predict
Again, according to Overlook: Personally, I think an important the timing of bear markets, but it
factor in Overlook’s success is prepares for them because investments
The result of this focused and Richard Lawrence’s goal “to outlaw “during bear markets create years of
independent structure is that greed”. Aside from investing in outperformance”. It is bear markets,
Overlook Investments has companies that have excellent not bull markets, which bring about
aggressively eliminated many of the corporate governance, this guiding periods of greatest value creation. The
conflicts of interest, the pressures principle means that his small team of objective is to be a buyer during bear
to conform, and weak policies that employees are incentivised by long- markets, which Overlook achieves by
are prevalent in the industry. In term compensation that is tied to the maintaining a high-quality investor

May 2017 The Gloom, Boom & Doom Report 3

base and a backlog of capital that Gorges dam in perpetuity); NetEase largest security and surveillance
wants to invest in the fund. This (NTES), China’s leading online game provider; Fuyao Glass (600660
access to capital in a bear market is developer/operator (see Figure 3); CH and 3606 HK), China’s largest
an essential component of the fund’s Taiwan Semiconductor Manufacturing manufacturer and distributor of
superior performance. Overlook (TSM), a leading integrated circuits automobile glass (70% market share);
maintains a high-quality investor and wafer manufacturer (see Figure 4); and Shanghai International Airport
base by being extremely transparent, SK Hynix Inc. (000660 KS), a (600009 CH), operator of Shanghai’s
disciplined, and consistent in its manufacturer of semiconductors such Pudong and Hongquiao airports.
investment philosophy. Its clients as DRAM, NAND flash memory, and As indicated above, Overlook
know exactly what they get from SRAM chips; Hangzhou Hikvision typically invests in only about 20
investing in the fund: an investment Digital Technology Co., Ltd, China’s stocks. The first five holdings listed
strategy that is based on the Overlook
value stock model, and which,
although flexible, does not become a
Figure 3 NetEase, 2007–2017
momentum player in the final phases
of bull markets and excessively bearish
near market bottoms. Going back
to Figure 1, which shows Overlook’s
performance relative to the MSCI Asia
Index ex-Japan, we can see that during
market boom years (such as the late
1990s and the years just prior to the
Global Financial Crisis of 2007) the
fund underperformed the MSCI Asia
• Aside from these more
organisational and disciplinary
features, Overlook’s proven
investment philosophy and various
components that provide a framework
for picking stocks contribute to its
outperformance. Its emphasis is on
identifying superior businesses whose
management has a high degree of Source: www.thechartstore.com
integrity, that have free cash flow,
and whose equities are at bargain
valuations. Over the years, I have
observed Overlook’s investment
Figure 4 Taiwan Semiconductor Manufacturing, 2007–2017
strategy. Frequently, the team
identifies excellent companies but
their stock prices are too expensive.
Because of Overlook’s long-term
investment horizon, it can wait
— sometimes for years — until an
attractive company’s stock reaches
“bargain valuation” and provides
Overlook with an excellent buying
• Above, I mentioned that
Overlook is extremely transparent.
The fund publishes regularly a full list
of its holdings and explains in detail
the reasons for having bought each of
the approximately 20 stocks it owns.
Currently, Overlook’s large holdings
include, among others: China
Yangtze Power Company, Ltd, the
leading Chinese hydro generator with Source: www.thechartstore.com
irreplaceable assets (it holds the Three

4 The Gloom, Boom & Doom Report May 2017

above account for approximately to emphasise that I’m not writing strategy, and investments, due to its
35% of the portfolio. In other words, about Overlook’s superior long-term impeccable transparency. However, I
the Overlook portfolio is highly performance with a view to advertising could have written about numerous
concentrated. Also, whereas the fund the fund. As I said above, I am a small other active funds in Asia that have
tends to hold stocks for the long term and happy shareholder, but investors significantly outperformed their
(if I recall correctly, Overlook bought need to assess the suitability of any respective indices. Take, as an example,
NetEase in 2011, while TSM has investment in the context of their own Jeep Chatikavanij’s Thailand-based
been part of the portfolio for at least individual financial condition. (I forgot Ton Poh Fund (www.tonpoh.com).
20 years), it is not shy about making to mention that Richard Lawrence and The fund’s class A shares have not only
major portfolio realignments. Until a his wife Dee set up Projecto Mirador, a vastly outperformed the MSCI EM
few years ago, the fund had zero direct charity that builds and installs cooking annualised returns, but also those of
exposure to China. Now, more than stoves in Central America — see www. MSCI Thailand (see Figure 5).
50% of its assets are invested there. proyectomirador.org.) Similarly, Kenneth Ng’s NT
Richard’s argument in favour of Asset’s Asian Discovery Fund has,
China’s overweight position is that ACTIVE VERSUS PASSIVE over time, significantly outperformed
there are numerous companies in INVESTING the MSCI Asia ex-Japan Index (see
China that have such a dominant Figure 6). However, as in the case of
position in their home market that, Above, I wrote about Overlook Overlook, there were also periods
over time, they can be expected to because I’m familiar with its team, when the NT Asian Discovery Fund
eat their international competitors as
well. In other words, he believes that
many companies around the world
Figure 5 Ton Poh Fund Class A Shares Annualised Performance,
simply won’t be able to compete with
their Chinese counterparts. I fully
agree with him on this point. I believe
that in 20 years or so, many Chinese
companies will have displaced the
dominant positions that Western
and Japanese companies hold
today. Furthermore, I wouldn’t be
surprised to see China’s stock market
capitalisation reach more than 30%
of global stock market capitalisation.
(See Figure 13 of the April 2017 GBD
report, which showed the relative sizes
of the world’s stock markets at the end
of 2015.) Source: Ton Poh Fund (www.tonpoh.com)
Along with the fund’s shift of
assets into China, I have also noticed
that it has a much larger exposure
to high-technology, semiconductor,
and “new economy” types of stocks Figure 6 NT Asian Discovery Master Fund’s Gross NAV (USD/share
than it had 20 years ago. Of the six – upper line) versus MSCI Asia ex-Japan (rebased to 100 –
largest holdings, five are tech-related lower line), 2006–2017
companies. Considering that some
of these companies have performed
superbly in the last few years (see
Figures 3 and 4), but that they are also
subject to the business cycle, I would
be inclined to reduce my positions (see
also below).
I didn’t intend to write about
the Overlook Fund with regard to its
individual stock holdings. Rather, I
wanted to show that active portfolio
management is far from dead and
that, with a disciplined investment
approach, significant outperformance Source: NT Asset (www.ntasset.com)
of indices is achievable. Also, I need

May 2017 The Gloom, Boom & Doom Report 5

underperformed the index (see
Table 2 Performance of NT Asian Discovery Fund versus MSCI
Table 2).
ex-Japan Index, 2006–2017
I could list numerous other
funds that have outperformed their
respective benchmark indices, but for
now let’s assume that a disciplined
and long-term-oriented investment
strategy can beat an index. The three
managers I wrote about above all have
one feature in common. They spend
their time analysing companies, not
the weighting of an index, which other
more traditional active managers use
to structure their portfolios.
Kopin Tan recently wrote an article Source: NT Asset (www.ntasset.com)
entitled “A New Dawn for Active
Investment Managers?” (see Barron’s
Asia, April 15, 2017), in which he
stated: “Back in the late 1980s, about
Figure 7 Cumulative Inflows into Domestic Index Funds versus
half the assets in the active universe
Outflows from Actively Managed Mutual Funds, 2007–2015
were in funds shown to be highly
differentiated from indexes. By 2015,
that level had shrunk to 24%, says
Martijn Cremers, a professor at the
University of Notre Dame who has
studied active managers. ‘You can say
active managers have become less active
over time,’ he adds.”
So, why have active managers
become less active? In the 1990s,
under the influence of all kinds of
consultants, institutional investors
that had allocated funds to active
active managers who had moved far
away from the weightings of their Source: Investment Company Institute
respective benchmark index began
to sue those managers if they badly
underperformed their benchmark.
A famous case involved the late Because of the law suits that were passive funds than with active managers
Tony Dye, a brilliant fund manager filed by the trustees of pension and who, to be fair to them, couldn’t in
at Phillips & Drew, who had grossly endowment funds, and other clients, practice outperform their benchmark
underperformed the FTSE Index in against Tony Dye and other active given the impediments they faced, as
the period leading to the 2000 top managers who badly underperformed outlined above (see Figure 7).
and was sacked in February 2000, a a given benchmark index, active There is another question we must
month before the market began to managers have become less active and ask. What are the consequences of a
tumble. (As an aside, in 2007, Dye are reluctant to depart from the sector shrinking pool of actively managed
argued in a letter to the Financial weightings of an index. It’s not hard money? It is obvious that if actively
Times that the Western financial to see that such a closet-indexer will managed funds shrink and money
system needed “a clean-out of Augean seldom outperform their benchmark flows into passive funds, fewer fund
stable proportions”, adding: “In the (also due partly to their fee structure), managers will find jobs and then only
meantime, those responsible for this preferring to “fail conventionally at lower salary levels. Furthermore,
state of affairs are being grotesquely than to succeed unconventionally”. the number of research analysts and
rewarded and pleading for more of (John Maynard Keynes: “Worldly research budgets will be cut.
the same policies that created these wisdom teaches that it is better to fail The Financial Times recently
problems in the first place. It looks to conventionally than it is to succeed carried a lengthy article by Robin
me as if we are at the end of this road, unconventionally.”) Wigglesworth titled “Final Call for the
and we have no Hercules.” Tragically, As active managers became less Research Analyst? Under Pressure to
Tony Dye died in March 2008, just active, institutional pools of money Cut Costs and Meet New Rules, Banks
ahead of the Global Financial Crisis.) found it more economical to invest in and Brokerages are Shedding Jobs”

6 The Gloom, Boom & Doom Report May 2017

(February 7, 2017). The article explains
Figure 8 Investment Banks’ Global Research Budgets, 2005–2017
that the changes in the industry are
frustrating and disappointing.

It’s not much fun any more.…

Over decades banks and brokerages
have assembled armies of analysts
to decipher central bank speeches,
parsing the entrails of the bond
market, sifting through corporate
balance sheets and guessing where
copper prices or the Turkish lira
are heading. Research served both
as external marketing and as fodder
for the bank’s own traders, and
the best analysts were accorded
rock star status in the finance Source: Edison Investment Research, The Financial Times
industry. But the investment
research business is now in crisis….
The majority of “sellside” reports
go unopened or unread on the
Figure 9 Research Headcount, 2012–2016
desktops of trading floors.

According to Quinlan &

Associates, the bigger banks and
brokerage firms email 40,000 pieces
of research a week, but only 2–5% of
these emails are read, industry insiders
say. The Bank Credit Analyst (BCA)
estimates that the total annual budget
for analyst research is US$16 trillion.
Quinlan & Associates further note
that 30% of global asset managers
plan to slash their research budgets by
a third (see Figure 8). Source: The Financial Times
I read this with some amusement
because, just a few days ago, a senior
employee of the CFA Institute (under
the umbrella of non-profit, a great According to one analyst, “The disentangle European operations
business, I might add) told me proudly big traders are algorithms these days. from a global business, some
that this year a record number of It has become an Amazon-style world investment managers will in
candidates will take the CFA exams. where you can just buy a stock or a practice apply the standards across
But how will all these candidates bond electronically. That’s great for their operations. Asset managers
find jobs at the inflated salaries they clients, but it’s a huge, huge change are also coming under pressure
expect, given Quinlan & Associates’ for the research business.” from passive alternatives like
findings (see Figure 9)? Furthermore, according to the index-tracking and exchange traded
The Financial Times opines further: Financial Times: funds. Last year more than $1bn a
“[E]ven with more innovation, the day flowed from active managers
economics of sellside research will The evolution towards unbundling to passive funds, ramping up the
remain challenging. Money managers research from trading commissions incentives for investment groups to
have historically rewarded banks will be accelerated by Mifid II. [A cut costs.
and brokerages with research they batch of incoming EU legislation
liked with trading business, which — ed. note.] The second Markets in I began working in the investment
often came with fat commissions. Financial Instruments Directive banking and brokerage industry
Nowadays, electronic markets coupled will force investment groups to in 1970, so I’m well aware of how
with regulatory requirements for asset split out payment from research, tough business conditions in the
managers to always seek the best- either covering the cost themselves industry can be. By 1982, the US
possible execution have frayed this or passing it on overtly to clients. stock market was no higher than
‘bundled’ approach.” As it is hard for asset managers to it had been in 1970 and, with the

May 2017 The Gloom, Boom & Doom Report 7

exception of a few months, the
Figure 10 The Expected Rise in Independent Research Market Share,
mutual fund industry was plagued
throughout the 1970s by continuous
net redemptions. Furthermore, high
interest rates meant that investors had
little incentive to invest in equities.
So, the brokerage industry in the
1970s was far more depressed than
it is now. However, I fully agree that
the current environment is “not
much fun anymore”. Employees at
financial institutions spend most
of their time on compliance issues
(as do the clients) and reckon they
are lucky if they can still use the
washroom without asking some useless Source: The Bank Credit Analyst
compliance officer for permission. But
in recent years these horrible freedom-
suffocating and business-constraining
conditions have encouraged the grow even during recessions. The because what were still at that time
growth of independent research high-quality growth stocks of the early small hedge funds (I’m not aware of
boutiques (see Figure 10). seventies included companies such any hedge fund prior to the late 1970s
The FT explains: as Polaroid, Eastman Kodak, Xerox, that had more than US$100 million in
Burroughs, IBM, Digital Equipment, assets under management) understood
Independent research boutiques Sears, Kresge, Johnson & Johnson, that the one-decision stocks of the
will be the winners from Mifid McDonald’s, Coca-Cola, etc. The 1970–1973 bull market would also
II as they will be able to compete widely accepted investment strategy become one-decision “sell” stocks
more directly with banks for an to buy “growth at any price” led to in a bear market. Due to their small
investment firm’s dollars. But a massive concentration of money size compared to the institutional
the combination of cost-cutting invested by mutual and pension “elephants”, which were stuck with
and regulations is pushing many funds, and by the trust departments stocks that they couldn’t sell on
investment groups to build up of the major US banks, in about disappointing news, hedge funds
their own in-house analysis teams. 50 stocks, which sold at anywhere could short the “nifty fifty” stocks one
In response to the new rules, 38 between 30- and 70-times-earnings. after another.
per cent of fund managers polled Not owning these stocks between 1970 Today, the situation isn’t all that
by the Edinburgh-based Electronic and January 1973 (the stock market different. Investors believe more than
Research Interchange said they high) would have led to a massive ever that, based on Ibbotson analysis,
will expand their internal research underperformance of the major stocks always outperform bonds and
teams rather than relying on indices. However, any rational investor cash in the long run. Based on solid
traditional sellside analysts. would have had to be concerned evidence that around 80% of active
about such a heavy concentration managers underperform the indices,
WHY ACTIVE INVESTMENT of money in such a small number and given the low level of interest
MANAGEMENT WILL REVIVE of stocks, which frequently made up rates, it’s easy to understand that
more than 70% of these institutions’ investors are piling into passive equity
The current passive investing bubble portfolios. (At White Weld, where strategies (index equity ETFs and
(Ned Davis coined this expression) I worked, the fund management index equity funds). But as Rupert
reminds me of the “one-decision department had 100% of its money in Hargreaves points out (Business Insider
stocks” or the “nifty fifty” stocks of these stocks….) of March 30, 2017):
the early 1970s. At that time, leading The heavy concentration of
brokerage houses and institutional investors’ funds in very few stocks at [A Ned Davis] note draws
investors argued that the optimal extremely high valuations (also given attention to the fact that at the
investment strategy involved buying that Treasury yields were in excess of top of every market, investors
high-quality growth stocks at basically 7%) didn’t go unnoticed by a handful always cling on to the narrative
any price because, over time, eternally of young hedge fund managers, who of the times to rationalize excess.
rising earnings would reduce achieved huge gains (in percentage This time around it seems passive
valuations and lead to higher stock terms) by shorting these stocks in investing is part of the narrative
prices irrespective of the economic the 1973/1974 bear market. In my with investors sticking to the line
environment. It was argued that opinion, the growth stock cult gave “don’t worry about fundamentals
these quality growth stocks would birth to the hedge fund industry or values; don’t worry about

8 The Gloom, Boom & Doom Report May 2017

market timing; just buy the market
Figure 11 Median 252-Day Correlation of S&P 500 Stocks to the S&P
and hold.”
500 Index, 1972 – March 2017
The team at Ned Davis
Research, however, believes that
this trend may be coming to an
end. Specifically, they point to
falling S&P 500 stock correlations
as a sign that active managers may
be starting to regain some of their
lost respect [see Figure 11]. As the
market rolls over, it will be active
managers that succeed while
passive indexes struggle. Ned
Davis’ research points out that
today, thanks to the rise of passive
investing, all of the S&P 500’s
components are overvalued
whereas at the height of the dot-
com bubble, only growth stocks Source: Ned Davies Research, Business Insider
were in demand and value equities
looked cheap. Today, almost no
equities look cheap as they’ve all
been dragged higher by the rising
Figure 12 Cross-Asset Correlations Have Fallen Sharply, Six-Month
tide. In the year 2000, well over
Correlation, January 2003 – January 2017
90% of all the assets in mutual
funds were in growth funds. Today,
the value of assets in growth funds
is well below its 20 year mean of
57% but the S&P 500 trades at
record highs.
Ned Davis’ analysts believe
that this bubble is about to burst,
and the main reason given as why
this could be the case is due to the
breakdown in correlation between
assets. Over the past year, the
correlation of the S&P 500 versus
other asset classes has plunged
from a high of 0.5 to 0.28. In the Source: Bloomberg, Morgan Stanley Research
S&P 500 itself correlations have
also decreased from a high of 0.775
seen in 2013 to a current low of
0.475 [emphasis added]. sharply, cross-asset correlations have For years, hedge funds have
fallen. In just four months, we have blamed high correlation, which is
I should point out that Morgan gone from a market of unusually close accompanied by low volatility (MS:
Stanley (MS) observed in January of linkages across markets to one with “Since lower correlation has helped
this year that a “correlation crash” usually divergent returns.” to depress volatility”), for their poor
was happening in the markets Naraparaju further added that performances (see Figure 13). MS
(see Figure 12). According to MS, collapses in correlations usually rightly notes that for investors, “it
the cross-asset correlations that happen in the late stage of an seems reasonable that it’s hard to
existed before the 2016 election economic cycle. According to extract alpha from macro trends when
had collapsed. MS’s Phanikiran Naraparaju, in the late stage of an all markets are moving together”.
Naraparaju and a team of strategists economic cycle, individual assets are But, “with that shifting, the backdrop
wrote: “‘Crash’ is not a term used influenced more by events peculiar should be better”.
lightly (indeed our editors here at to them and less by broader concerns I am far less certain that when
Morgan Stanley won’t let us use about an economic downturn. In correlations break down and volatility
it without a good reason). But we other words, market drivers become increases, the “backdrop” for alpha
struggle to think of another word to more diverse, so the linkages between generation will be far better for hedge
describe just how much, and how various assets break down. funds.

May 2017 The Gloom, Boom & Doom Report 9

strategy. In the case of hedge funds,
Figure 13 Volatility Index (New Methodology), 2010–2017
my sense is that the industry has
become too big and too short-term
oriented. I explained above how well
hedge funds performed in the 1970s.
However, at that time the hedge
fund industry was tiny compared to
both the stock market capitalisation
and the volume of foreign exchange
transactions. The situation is different
today. Hedge funds have become a
US$3 trillion industry (see Figure 15).
Also, until the late 1970s, there
was very little futures and options
trading. Consequently, the long or
short exposure of hedge funds was
far smaller relative to the size of the
financial markets than it is today.
Currently, hedge funds can leverage
their positions through the derivatives
Source: www.thechartstore.com markets almost ad infinitum. Since,
in the derivative markets, there is a
winner for every loser, I’m inclined
to think that the breakdown of
correlations and the increase in
Figure 14 British Pound, April 2016 – April 2017 volatility will be favourable for some
hedge funds and unfavourable for
Above, I expressed my doubts
that hedge funds would benefit much
when correlations break down and
volatility increases. Let’s break down
the active money managers into two
categories and focus on equities.
Group A are hyper-active traders.
They take and liquidate positions
daily. Group B are active managers
similar to Richard Lawrence, who
have a long-term time horizon. Their
portfolio turnover is extremely low.
Group B selects equities according to
some fundamental criteria but then
often holds these stocks for years.
BofA Merrill Lynch recently published
Source: www.thechartstore.com a figure that shows the probability of
negative returns over different time
horizons (see Figure 16).
What Figure 16 really shows is that
The reason I am saying this is that against investors’ expectations, was so the longer an investor holds a basket
I find positions among hedge funds sudden and violent, as in the case of of equities, the less likely it is that he
to be extremely one-sided. At the end the British Pound in mid-April, that will lose any money. (According to
of last year and early this year, hedge the shorts had no way to get out of Figure 16, investing in commodities
funds had large exposures on the short their positions without incurring some seems to be far riskier.) Since many
side of the Euro, British Pound, and losses (see Figure 14). individual investors (day traders)
US Treasury bonds and notes. What Furthermore, whether falling and macro hedge funds belong to
happened? The Euro, Treasuries, S&P 500 stock correlations are a sign Group A, which are the hyper-active
and the British Pound all rallied. that active managers may be starting traders who trade markets aggressively
Moreover, sometimes the adverse to regain some of their lost respect (frequently moving in and out of
price movement, which occurred will depend on active managers’ positions several times a day), I doubt

10 The Gloom, Boom & Doom Report May 2017

fiduciary duty) would by 1989 have
Figure 15 Hedge Fund Assets under Management (US$ billion),
been significantly underweighted
Japanese equities. I concede that in
the final stages of a bull market the
indices will outperform value-oriented
active managers because investors’
money becomes momentum driven
and focuses — as happened in the
1970s and in 1999/2000 — on a very
few pricey stocks. This seems to be
the case again now in the US, where
five of the 10 largest stock market
capitalisation stocks are technology
companies. Therefore, the investor
buying an S&P 500 index fund
Source: Hedge Fund Research, BofA Merrill Lynch Global Research today is not only buying the US stock
market at peak valuation in terms
of price-to-sales ratio, but is also
investing heavily in high-tech stocks
whose precise future no one knows.
Figure 16 Probability of Negative Returns over Different Time
I understand that fund managers
Horizons, 1971–2017
have short memories, and that today’s
young fund managers were still in
college (or, more likely, in primary
school) when the dot.com bubble
burst, decimating tech companies. But
maybe some of these smart millennials
will remember that, once upon a
time, Nokia dominated the mobile
phone market and BlackBerry had a
commanding lead in smartphones (see
Figure 17). Personally, I would love to
know which high-tech company will
decline by less than 70% from its high
Source: BofA Merrill Lynch US Equity & Quant Strategy, S&P, CRB in the next bear market. Just a gentle
reminder: the Semiconductor Index
(SOX) declined by 85% between its
2000 peak and its 2002 low, and by
that lower correlations and higher company’s stock reached a “bargain 69% from its 2007 high to its 2008
volatility will help improve their valuation” that provided Overlook low (see Figure 18). And yes, stocks
performance. Why? High-frequency with an excellent buying opportunity. always go up, but the Semiconductor
trading programs can easily front- I regard this long-term focus Index is still down 27% from its 2000
run these short-term traders who on buying the best companies at a high (see Figure 18).
move in and out of markets based reasonable price as the key difference BofA Merrill Lynch (see also above)
on inconsistent tweets from Mr. between an active manager and an believes that, “while quants are falling
Trump and misleading statements by index equity fund. By definition, over each other to develop the most
Mrs. Yellen, which are not “forward an index fund will always have its advanced complex trading strategies
guiding” but “forward confusing”. largest exposure to the highest market fundamental investing remains
However, I see an opportunity capitalisation stocks, which are in the best way to profit over the long
for active managers in Group B who most cases the most expensive ones term”. According to Bank of America,
have a long-term time horizon. When as well. Think of Japan in 1989 when valuations explain almost 90% of the
I described Overlook’s investment its stock market capitalisation made S&P 500’s returns of variability over a
strategy above, I mentioned that its up 50% of global stock market cap. A 10-year time horizon. The BofA team
investment team would often identify global equity index fund would have “has yet to find any signal with even
excellent companies whose stock prices had 50% of its holdings in ludicrously close to that level of predictive power
they considered to be too expensive. overpriced Japanese equities, whereas over the short term”.
I added that Overlook’s long-term any responsible active manager (a I should add that I have found two
investment horizon allowed it to wait, money manager who remembers strategists who have been successful at
sometimes for years, until an attractive that fund management entails a finding relative value among financial

May 2017 The Gloom, Boom & Doom Report 11

with a 237% increase in the MSCI
Figure 17 BlackBerry’s Travails, 2009–2016
AC Asia ex-Japan and a 190%
increase in the S&P500 over the
same period [see Figure 19]. This
means the portfolio has risen by an
annualised 18% since inception,
compared with an annualised 8.7%
increase in the MSCI AC Asia ex-
Japan and an annualised 7.6% gain
in the S&P500.
The portfolio outperformed
the regional index significantly
last quarter, rising by 20.4% in
US dollar terms, compared with
a 13.2% rise in the MSCI AC
Source: www.statista.com Asia ex-Japan. This performance
reflects primarily the rebound in
India following demonetisation,
since 53% of the portfolio remains
invested in India with an emphasis
Figure 18 Semiconductor Index (SOX), 1999–2017
on domestic-demand themes.
This is precisely the area of the
Indian market which was hit most
in 4Q16 by demonetisation. The
portfolio, which also outperformed
in 2016 despite demonetisation,
remains predominantly invested
in domestic-demand names. [I
am an investor in Jon Thorn’s
India Capital Fund, which, over
the years, has also outperformed
the Index — www.indiacapital.
com — ed. note.] Aside from India,
the main theme of the portfolio
is China, which represents 24%
of the portfolio. The portfolio
continues to be primarily geared to
the domestic-demand story in Asia.

Source: www.thechartstore.com Of the Japanese portfolio, Wood


The Japan long-only thematic

markets. My friend Michael Belkin’s only thematic portfolio, both of which portfolio, introduced on 17 March
model has been remarkably accurate, have performed superbly over time 2005, marginally outperformed
since the late 1990s, in identifying (see Figures 19 and 20). the Topix last quarter, rising by
sectors and individual stocks that Wood recently wrote about the 0.6% in yen terms compared with
would outperform or underperform performance of GREED & fear’s long- a 0.4% decline in the Topix [see
the index (belkinreport@gmail. only thematic portfolios: Figure 20]. From a longer-term
com). His favourite sector since late perspective, the Japan portfolio is
2015 is the gold and silver miners. A landmark has been reached up 101% in yen terms and 88.6%
He currently also has a buy for US in the Asia ex-Japan thematic in US-dollar terms since inception,
Treasuries. portfolio. Since its inception 14.5 while the Topix has risen by 26.9%
Another friend of mine, the CLSA years ago at the end of 3Q02, in yen terms and 19% in US-dollar
strategist Chris Wood, publishes every the portfolio has risen by 1008% terms over the same period. This
week the CLSA Asia ex-Japan long- in US-dollar terms as at the end translates into an annualised gain
only thematic portfolio (which he also of last quarter. It has therefore of 6% in yen terms since inception,
calls “the GREED & fear thematic become a “ten bagger” to use compared with a 2% annualised
portfolio”), and the CLSA Japan long- trader parlance. This compares gain for the Topix. The Japan

12 The Gloom, Boom & Doom Report May 2017

stocks. I agree entirely with these
Figure 19 CLSA Asia ex-Japan Long-Only Thematic Portfolio, 2002– negative views. However, I equally
2017 understand the power of central
banks. Above, I mentioned Tony Dye,
the unfortunate fund manager who
had predicted, but died just before,
the 2007/2008 bear market. Dye had
argued that the Western financial
system needed “a clean-out of Augean
stable proportions”. “It looks to me,”
he said, “as if we are at the end of this
road, and we have no Hercules.”
Dye was right about his forecast
of the 2007/2008 financial crisis, but
he did not expect (nor did others,
Source: Chris Wood (christopher.wood@clsa.com), CLSA I might add) that Hercules would
appear in the form of central bankers
who saved the rotten financial system
and, through their asset purchases,
boosted equities and other assets right
Figure 20 CLSA Japan Long-Only Thematic Portfolio Performance and
up to the present day (see Figure 21).
Topix, 2005–2017
(I hope that Hercules will forgive me
for mentioning central bankers in the
same sentence as his name, because
they really have more in common with
the Nutty Professor than with the
heroic Hercules.)
According to BofA Merrill Lynch’s
chief investment strategist, Michael
Hartnett, “$1 trillion of financial
assets that central banks (European
Central Banks & Bank of Japan)
have bought year-to-date (= $3.6tn
Source: Chris Wood (christopher.wood@clsa.com), CLSA annualized = largest CB buying in
past 10 years); ongoing Liquidity
Supernova best explanation why global
stocks & bonds both annualizing
portfolio remains a combination draw-downs (see Figures 2, 6, 19, double-digit gains YTD despite
of domestic-demand names and and 20). Knowing a little about the Trump, Le Pen, China macro.”
exporters. psychology of investors, I can assure I have repeatedly shown in
my readers that any investor who has previous reports what happened to
For good order’s sake, I need to 100% of his money in equities will Mexican stocks during the money
point out that I have no business have little appetite to take advantage printing period between 1978 and
relationship with either Mr. Belkin or of low valuations after the value of 1988. In local currency terms,
Mr. Wood. Both these gentlemen are his portfolio has declined by 50% Mexican stocks went ballistic; while
friends and I have greatly benefited or more. Therefore, aside from the in real terms (in dollar terms), they
from their insights. Yet, I also need high valuations we have today in moved erratically up and down but
to point out that although Wood’s asset markets and specifically in US ended in 1988 about where they had
thematic portfolios have done equities, I strongly recommend that been in 1978. In the meantime, the
extremely well over time, both the my readers diversify their money into Mexican economy collapsed. I have
Asia ex-Japan and Japanese thematic assets that have little, or an inverse, also explained, time and again, that
portfolios had big draw-downs in correlation to equities and financial central banks were in no way out of
2007/2008 (see Figures 19 and 20). assets in general. I am thinking here, bullets and could continue to print
in particular, of owning precious money at an accelerating rate for years.
INVESTMENT OBSERVATIONS metals (gold, silver and platinum, and What did Michael Hartnett just say?
related stocks). That, year to date, central banks had
We have seen above that in bear Recently, a number of prominent conducted the largest buying of assets
markets even outstanding active fund managers and strategists have of the past 10 years. Therefore, the
managers and strategists have large warned about the bubble in US money printing charade could go on

May 2017 The Gloom, Boom & Doom Report 13

(albeit dividends could come down)
Figure 21 Major Central Banks’ Assets, 2006–2017
and should perform relatively well
in an equities bear market. I also
bought Malayan Banking (MAY MK)
and CIMB Bank (CIMB MK) in
At least in the initial phase of
a stock market correction, I would
expect Treasuries and high-quality US
corporate bonds to rally. I doubt that
the Fed will increase rates this year by
more than another ¼ point — if at all,
given that the economy is weakening.
(US consumers are tapped-out, as
Source: BofA Merrill Lynch Global Investment Strategy the cost of living is rising faster than
(*= ECB+FED+BoJ+BoE+SNB) wages.)
My favourite asset class remains
the precious metals complex. In a
world dominated by an incompetent
and corrupt political class, and
irresponsible and insane central
Table 3 Selected Singapore REITs
bankers, I want to own incorruptible
currencies such as gold, silver, and
platinum. (They can be manipulated
temporarily and could at some time in
the future be expropriated.) However, I
concede that, as of this date (April 23,
2017), the market action of precious
metals and mining stocks is somewhat
Source: Maybank Kim Eng disappointing.
Above, I discussed the breakdown
in correlations and the likely increase
in volatility. Volatility is also likely
for much longer, with Mr. Trump Whereas I am in agreement with to increase because of Mr. Trump’s
begging Mrs. Yellen not to increase the pundits who are bearish about erratic behaviour and bizarre policies.
interest rates and to finance his fiscal equities, I’m far from certain that (I admit that I would have voted for
deficits, which are about to explode, other assets, except for precious him.) My friend Patrick McKim, who
with some form of QE4. metals and real estate in selective has written for this report in the past,
You don’t need to be an areas and countries, would perform has some great insights into what is
economist to see that this won’t end much better. Last month, I explained happening in the White House, which
well, but the when is unknown. What that European companies were he shares below. Now that I’m aware
could happen is that US stocks have a “relatively” inexpensive and had that, according to the Bank Credit
minor correction (10–20%), followed become an attractive acquisition target Analyst, only 2–5% of all research is
by the mother of all QEs. (Mr. Trump for US companies. (Please see the read (see above), I will understand
thinks in terms of “huge”, “great”, and recommended stocks in last month’s if some readers find it more useful
“awesome”.) A fair assumption is that report.) to check their Facebook page rather
with the US economy weakening, Regular readers of this report than peruse Patrick’s essay, which
another QE would be negative for the know about my exposure to Singapore actually reads like a novel by Robert
US dollar. and Hong Kong REITs, and to Asian Ludlum. But, may I at least suggest to
I explained above that Overlook’s properties. Maybank Kim Eng recently these restless investors that they read
long-term investment horizon allows it published an extensive report about Patrick’s concluding sentence. I should
to wait until a company’s stock reaches Singapore REITs and mentioned also point out that he knows more
“bargain valuation”. I recommend a number of stocks favourably (see about American history than anyone I
that my readers keep lots of powder Table 3). (Full disclosure: I own these know, and that I wish I could write as
dry, which will enable them to take stocks.) They all yield more than 6% well as he does.
advantage of a meaningful stock
market decline.

14 The Gloom, Boom & Doom Report May 2017

Corrupted Feedback Systems:
Will Trump Fix Them or Rely Upon Them?
Patrick McKim, E-mail: pat@pmckim.com

As quality of life for most around the globe continues to deteriorate, for a select few it continues to get much better, thank
you very much. Many initially look for the cause of these problems to where they are told to look by those who ultimately
benefit and rig the systems for themselves. It is a strange facet of human nature first thoroughly observed by Adam Smith in
his first classic, The Theory of Moral Sentiments, that the masses admire the wealthy and famous for that fact alone, whether
or not they are truly admirable individuals. This is especially true in today’s media-bombarded world. But as times get
worse, the masses become a bit more skeptical. This explains the emergence of new sources of news, real or “fake,” as well
as an angrier electorate and the election of Donald Trump.
Candidate Trump was able to see past these corrupted feedback systems from his empire of towers and give the
electorate a view that resonated with their own. It is an indication of how bad things are that most of politics was almost
able to successfully ignore this decline under the cover of lousy feedback systems in the press. In return for Trump’s honest
assessment, the electorate’s feedback was electing him to the presidency. The question now is: what feedback will he rely
upon to lead his presidency, the country, and even the world, as he progresses? And what will he give back in return? The
answers to that are not so clear as they change so rapidly — itself a form of very bad feedback, as the system never has time
to respond.
Probably the most important feedback system in any society is its main form of reward: money. Readers of this
publication well understand how “easy money,” fiat inflation, or high levels of debt destroy this feedback loop. Strangely,
while Trump pointed out the symptoms of easy money, he never indicated their root cause (Hillary couldn’t even find the
symptoms, let alone the causes), except to say he wanted to audit the Fed and get a new Fed head, and now even these steps
are in doubt. Given Trump’s reliance on cheap money for his real estate empire, and to cover his mistakes, it shouldn’t be
surprising that he would admit this is part of the rigged system.
Some believe that the effects of these money metrics are limited just to the “economy,” but, unfortunately, corrupted
economic system excesses overflow everywhere with cancerous effects to follow. Looking through history at inflationary
times in Revolutionary France and Weimar Germany, or even in the United States, we see that not only the political system
but also the fabric of society comes apart. In Revolutionary France, after fiat inflation had worked its insanity through
the system, the Committee for Public Safety gave rise to the Reign of Terror, which was entirely consistent and not at all
cognitive dissonance. Germany from the 1920s to the 1940s was no different. Today, as universities want to wipe out free
speech to protect snowflake students from hearing any contradictory views, they advocate violence to do it. Once again,
we see that the insanity of both the French Revolution and Hitler have returned, but few mention that all had extremely
bizarre financial regimes underlying the mess.
In the US, just before the French Revolution and its crippling inflation, George Washington, who had lived through
the debilitating inflation of the US Revolutionary War, warned a friend of its spreading pernicious effect: “Paper money
has had the effect in your State that it ever will have, to ruin commerce — oppress the honest, and open a door to every
species of fraud and injustice” (George Washington, Letter to Jabez Bowen, January 9, 1787).
John Maynard Keynes observed it as well, in The Economic Consequences of the Peace (1919):

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to
debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it
in a manner which not one man in a million is able to diagnose.

Regarding Weimar Germany, historian Paul Johnson, in Modern Times (1985), led us to other complicit broken feedback
loops and control systems — the press and the status quo who benefited from it.

It [Weimar inflation] was one of the biggest and crudest transfers of wealth in history. The responsibilities were clear;
the beneficiaries of the fraud were easily identifiable. Yet it is a depressing indication of public obtuseness in economic
matters that the German public, and above all the losers, far from “developing a proletarian consciousness” — as Marx
had predicted they would in such a case — blamed the Versailles Treaty and “Jewish speculators”.

What Johnson was referring to was the status quo — the military, industrial and financial ruling classes, as well as the
political classes on the outside — with a press that helped to deflect the true cause of the inflation onto a set of scapegoats,
all in order to preserve that status quo. These corrupted feedback loops created the environment that started the world
onto the path for the Second World War. Today in America it is no different when the press is controlled by a small
group and a personal agenda to continue perpetrating the same thing that got them rich while impoverishing much of the

May 2017 The Gloom, Boom & Doom Report 15

The American hubs of this broken financial feedback system that benefit the few at the expense of the many are
centered in New York (money distribution) and Washington, DC (money creation), where both of the candidates of
the last election are from. In Trump’s case his outlook is extremely New York centric, having never lived outside of the
state. It is from this culture and society that he gets much of his day-to-day feedback that matters to him, including that
of his colleagues and friends. That the investment banking culture is different from that of the rest of the country is an
understatement today: It is one of extremes, of animal spirits, of winner-take-all, and you rate what you get away with. In
negotiating with a New York law firm or a New York investment bank, one expects a one-sided opening offer completely
outside the realm of a win–win intersection of both sides’ interests. This New York style of negotiation that Ted Cruz noted
in the debates has spread to California, influenced by New York capital markets, where, for example, investors in SNAP’s
IPO will find themselves with no voting rights. (This ain’t your Dad’s tech company.) Trump and his royal family personify
this win–lose style. The question many are asking is, for whom is Trump negotiating? It is no coincidence that Trump’s
advisors include New York billionaires or centimillionaires, many from Goldman Sachs, the “vampire-squid,” as Mat Taibbi
has so aptly described it. Mr Trump appears only to look up to those at least as wealthy and powerful as he. Today, this
group also includes some retired military three- and four-star combat generals as well as the following:
• Treasury Secretary Mnuchin. Born in New York City; worked for Goldman for 17 years, as did his father. Bloomberg
described him as a “true creature of Wall St” in a 2012 article. He bought IndyMac, a failed Southern California lender,
with government assistance. Because of a loss-sharing agreement with the FDIC, some say IndyMac was incented under
Mnuchin to shove borrowers into foreclosure and have the government pick up the tab. Mnuchin has been associated with
George Soros and is a large Democratic political donor as well. Just the kind of guy to restructure US debt for the good of
Wall Street and the Davos crowd.
• Chief Economic Advisor to Trump, Gary Cohn. At Goldman for 27 years and a current Democrat, who started as a
commodities trader. He was involved with hiding Greek debt to sell Greece into the EU. He is described by critics as
“arrogant, aggressive, abrasive and risk-prone,” just the kind of guy you’d want to advise you on having a stable economy.
Ironically, Cohn has no true background in economics, only in trading. Given that ivory tower academicians have
mismanaged the economy so badly, one might consider this a plus, were it not for the rapacious ethos of a New York
commodities trader and the short time horizons under which they operate. With Cohn, one thinks of the Wall Street
classic book: Where Are All the Customers’ Yachts?
• Deputy National Security Advisor Dina Habib Powell. A friend of the first-daughter Ivanka Trump. While not a native
New Yorker, she gravitated there to Goldman Sachs after serving in the Bush Administration: personnel office in the
White House, later in Educational and Cultural Affairs at State, and finally in Public Affairs and Public Diplomacy at
State as well. While the Department of State is usually divorced from reality, as its recent history in hot spots like Benghazi
has demonstrated, these positions are even one step further removed from reality. Habib’s outlook appears to be more
politically correct in pushing a kumbaya globalist agenda while ignoring the reality of collapsing security around the world.
Most recently, a more experienced KT McFarland (and a woman) was taken out for Powell’s complete ascension. At
Goldman, she handled more fluff in the Goldman Sachs Foundation, where many partners objected to her receiving large
bonuses because she didn’t really do anything to generate revenues.
• Commerce Secretary Wilbur Ross. Born across the Hudson from New York City, he was a Democrat, but started
supporting Republicans along with Democrats in 2011. Ross, a long-time investment banker who invests in turnarounds of
basic manufacturing and extraction industries, is known as the “King of Bankruptcy.” He has bailed out Trump on more
than one occasion. He is fortunately “old school,” given his age and experience in a more “American” time, and has some
concern for the country.
• Strategic Advisor Steve Bannon. Very much an exception, despite his Goldman tenure. He seems to be in disfavor
because of his stand against the status quo and a demonstrated connection to the “deplorables” so necessary to Trump’s
election. Born and raised in southern Virginia, not New York, Bannon served as a “citizen-sailor” in the Navy for seven
years. After a Harvard MBA, he worked at Goldman for five years, primarily in LA, when Goldman was still a partnership
that shared risks. While Bannon has lived sporadically in New York, he has retained a rural outlook and a concern for
those crushed in the globalist asset-inflation scheme that benefits the wealthy. He mentioned privately to me that, after
TARP, many on Wall Street should have been prosecuted for “fraudulent conveyance” in packaging known bad sub-prime
loans, selling them as good to unsuspecting investors “reaching” for yield, and then betting against them in the markets
through default swaps.
After the financial system, the press is a second important corrupted feedback system. America’s Founding Fathers
relied on an independent and free press and protected it for that purpose in the Constitution’s Bill of Rights. The
Founders assumed it would remain local and true to the interests of the people, not of just the status quo. But as often
occurs in aging systems and cultures, once vital segments become corrupted, they often work in the opposite direction. One
should understand that a free press is incented in its own interest to sell more news and make profits by over-amplifying
its reporting through hyperbole and controversy. Yet, what is now becoming obvious is that the press has taken a side even
when it sells less news: Today the press over-amplifies one side with bias and turns off the volume on the contraindicatory
side. This is part of the reason for the decline in the paper and TV news industries and for the rise of bloggers and
alternative sources of news, including conservative talk radio that has grown so extensive.

16 The Gloom, Boom & Doom Report May 2017

Despite lagging sales, declining ratings and plummeting trust in news organizations, this behavior of mainstream
media continues. Why? Because the press is no longer independent but owned in an oligopoly of status quo interests that
continue to prop it up and receive the “cover” (not coverage) they need. Its direction/feedback is from its owners, not the
market/readership. For the owners, this is a cost of doing business elsewhere. Did Jeff Bezos buy The Washington Post for
altruistic purposes, or to make money? Of course, it was to make money … just not at The Washington Post. While Amazon’s
retained earnings since inception almost 25 years ago are $5 billion, Bezos’ net worth at $77 billion is 15 times higher. It is
highly doubtful that Amazon will ever get to Bezos’ level. This math makes his $0.25 billion purchase price of the Post but
a small price to pay to preserve a financial system that keeps his net worth absurdly high (think above all else, inflated asset
prices) and his personal power just as high. Amazon, with its narrow profit margins, needs every break it can get to keep its
fantasy P/E multiple in the stratosphere, and WaPo helps with that. Otherwise, Amazon and many other unicorns like it
would crash and some fail, particularly if they couldn’t receive government assistance in the next crash.
After the election surprise, particularly to the press, President Trump spoke of a “running war” with the media. Steve
Bannon backed up the President by stating to the New York Times: “The media should be embarrassed and humiliated
[with its clueless/biased, poor coverage of Trump’s movement] and keep its mouth shut and just listen for a while.” Makes
sense, rather than to continue to go off half-cocked. He added: “I want you to quote this: The media here is the opposition
party. They don’t understand this country. They still do not understand why Donald Trump is the President of the United
States.” Status quo press outlets around the country headlined, “Bannon Says Media Should ‘Keep Its Mouth Shut.’”
Never did a headline appear saying, “Bannon Says Media Should ‘Just Listen for a While,’” the operative part of the quote.
Someone who recognized it was a time to listen, that America didn’t have the luxury of continuing to make mistakes,
was the Second World War Chinese theater commander general, Joe Stillwell, who observed after American troops had
taken shellacking and been chased out of Burma: “I claim we got a hell of a beating. We got run out of Burma and it is
humiliating as hell. I think we ought to find out what caused it….” But instead, the press just kept on transmitting without
analyzing the body blow of feedback it had just received.
Immediately, the press and defeated Clintonistas moved onto Russia and Putin’s attempts “to control our elections.”
During the campaign, Trump said that the US was overextended, that NATO wasn’t paying its fair share and needed to
be rethought, that the Russians were going after our enemies in Syria, which was good, and that Russia and Putin weren’t
so bad — the enemy of my enemy is my friend. After Trump’s long-shot victory, the shocked Clintonistas decided to
blame their loss on Putin and Russia for meddling with the US election, and attempted both to explain their loss and to
destroy the Trump presidency before it started — very similar to what happened in Weimar Germany with their “stab in
the back theory.” Rather than admit to their horrifically bad candidate, who couldn’t win outside of New York and the
coasts — regions benefited by corrupted financial feedback loops — they claimed that Trump was somehow in cahoots with
the Russians. The press took up this story without question, something it increasingly does. We even saw the national
intelligence apparatus (Deep State) reinforce that line of supposition. Everywhere there were indications of Russian
“fingerprints.” Director James Clapper once again re-emerged with his lying eyes. He looked down and away — a common
direction when lying — just as he did when he affirmed that the US did NOT collect information on US citizens. This
time. Clapper confidently asserted that he was sure that Russia was messing with the elections and that it went to the top.
Somehow this was related to Trump, and Congress should impeach Trump. The logic of the Clintonistas and the press,
particularly with the illiterate spokesmodel Maxine Waters, was that certainly Trump was guilty. Finding it was but a trifle,
barely to be bothered with before impeachment. It was as though Waters was channeling Senator McCarthy from the 1950s
with his list of Communists, now updated to a Trump–Putin collusion that no one could really find.
Still without proof, senile neo-con war god, Senator McCain claimed that this Russian cyberintrusion was an “Act of
War.” It is as though life is again imitating art, moving from McCarthy’s 1950s, to the 1960s madcap frenzied comedy
classics: It’s a Mad, Mad, Mad, Mad World and The Russians Are Coming, The Russians Are Coming. But this time it’s not a
comedy: could it be an outgrowth of a desperate asset inflation to keep the status quo in power and deflect attention?
Then, once again, Wikileaks came out and showed that these US intelligence agencies regularly use a set of tools to
plant “false flags,” leaving false electronic “fingerprints” to direct attention elsewhere. Other indications came up to affirm
Wikileaks, and that not only was national intelligence planting “false flags,” but the Obama White House — through NSA
head Susan Rice, another purveyor of false feedback in Benghazi, who was up to “blame game” shenanigans of her own.
Unfortunately, while a sharp, common-sense president would just order the cessation of all this surveillance on
all Americans as a gross intrusion into our right to privacy, instead Trump’s new head of the CIA publicly castigated
Wikileaks’ source and Julian Assange, its head, for exposing CIA techniques — yet more examples of cognitive dissonance.
Wrapping himself in the flag, Director Pompeo threatened free speech and freedom of the press in order to go after Julian
Assange — something Hillary wanted as well when she created a new verb “drone” to replace “assassinate,” as in “Why can’t
we just drone this guy?” Yet, many believe that Assange, along with Richard Snowden, has provided an invaluable service
to Americans, showing that, despite being 17 years into the 21st century, we are really closer to 1984. This was particularly
frightening because past CIA directors have rightfully chosen to stay in the background and not call attention to the
“Agency.” Instead, Pompeo has been out giving medals to the Saudis for fighting terrorism. You can’t make this stuff up!
And then the chaotic critical press stopped.
Trump reversed himself in a series of actions.

May 2017 The Gloom, Boom & Doom Report 17

• Attack Syria and declare Putin a bad guy.
• State that NATO is no longer obsolete.
• Say goodbye to a strong dollar and high interest rates.
• Assert that China is no longer a currency manipulator.
• Yellen’s future is brighter.
• Revive the Export Import Bank.
• End the hiring freeze on federal employees.
• There may no longer be radical Islam.
• Bannon, the voice of the “deplorables,” is demoted (collateral damage) to just a “guy who works for me.”
Then the press flipped as well, declaring Trump a strong, thoughtful, and conscientious leader. Except for Rand Paul,
Congress barely elicited any objection to not being consulted on this very real Act of War. The explanation to the people
was as muted. There appears to be no clear strategy — entry, conducting the war, or exit. Yet, these changes are making
Trump great again, something his badly bruised ego was needing. He is receiving the feedback he so wants as a tough guy.
And like a timid George Bush, he seems to revel in being a tough war president. Ann Coulter, normally a big friend of
Trump’s, observed: “War is like crack for presidents. It confers instant gravitas, catapulting them to respectability, bypassing
all station stops. They get to make macho pronouncements on a topic where every utterance is seen as august.”
The military is a control system in the feedback loop, one the Founders chose to strictly limit because the American
Revolution was fought to limit these kinds of standing armies in the American Colonies. Following the First Amendment
regarding the sanctity of freedom of the press (our second broken feedback loop), the Second Amendment allowed local
militias, the right of the citizenry to bear arms, to provide local safety and as a potential counter to a “standing army.”
The Third Amendment prohibited the quartering of troops in citizens’ homes (pointed at stopping “standing armies”). In
the Constitution, Congress, alone, explicitly has the right to authorize the President to declare war. Since Vietnam, this
power has been significantly eroded. During the campaign, Trump promised to limit conflicts that are not in our interests,
something that contrasted him with Hillary. Has this disappeared, as it did with Bush, when he first criticized Al Gore for
“nation building”?
What is also of concern is that the two primary civilian advisors on military matters, and a third on domestic security,
are all retired or current career generals: they include the Secretary of Defense, the National Security Advisor and the
Secretary of Homeland Security. Never in US history have even two of these three positions been held simultaneously by
military generals. Only once since the Second World War have we had a retired general as Secretary of Defense. This was
the thoughtful and independent George Marshall, who never got cozy to President Roosevelt or the military. At that time,
Marshall was probably the only person the war-tired populous respected and trusted enough to build the US war machine
back up for the Korean War. (The prior Secretary of Defense had naively completely demobilized the Army and the Navy
because he felt the Air Force would be able to manage wars from the air alone — based on a common misconception that
bombing wins wars.) There was no concern with Marshall as SECDEF given his prior excellent performance as SECSTATE
with the Marshall Plan.
National Security Advisor General McMaster first became notable as a major whose book Dereliction of Duty covered the
deceit of President Johnson and SECDEF Robert McNamara in running the Vietnam War, and in bringing in weak service
chiefs who would not challenge White House decisions. One of McNamara’s strategies for escalating the war, as a numbers
man and an intellectual, was the concept of graduated escalation to signal the North Vietnamese that the US would always
escalate above what the North could do. It ignored a basic understanding of war that was observed by both Carl von
Clausewitz (author of the famous text On War, studied by all militaries) and Admiral James Stockdale, Medal of Honor
winner, senior officer in the “Hanoi Hilton” concentration camp, and later President of the Naval War College. Thinking
of Clausewitz, Stockdale wrote after the war: “We have at times made assumptions that did not account for such facts
as: (1) War is a serious business; (2) People get mad in war; (3) The laws of logic are valueless in bargaining under those
circumstances” (A Vietnam Experience, p. 17).
Yes, in war people get pissed and sometimes you can’t expect them to “behave.” Neither can you bomb them into the
Stone Age when they are already there. Generals Mattis and McMaster, both of whom I respected in the past, need to
realize that they are the adult supervision in the room, not Wall Street, and not the royal couple. It is ironic that the only
person to dissent in a meeting on the Syrian bombing was Steve Bannon, retired Navy lieutenant, recently demoted from
the NSC (for good reason: to de-politicize the politicized NSC of Susan Rice).
This time, if the US is dragged into yet another conflict with IEDs, terrible deaths and mangled wounded, the public
will likely blame not only these generals but also the entire military. Vietnam-era military veterans like Senator Jim Webb
and General Zinni tried to stop the “stupid cycle” during the last Iraq War. The condemnations of the military won’t
be fair, but people will say “they volunteered at the bottom, and those generals should have known better at the top.”
Given Trump’s capricious nature and prior record of blaming “the generals,” it is entirely possible that he will blame any
debacle on his civilian generals. Now, McMaster has the ironic opportunity of being a player in his own drama, repeating
the mistakes of Vietnam that he observed in his book and — not to mention — experienced in Iraq. Talk about not paying
attention to the feedback of history.

18 The Gloom, Boom & Doom Report May 2017

A retired Marine Corps colonel friend of mine, who should know better, even gave the perfect Nazi answer: “McMaster
has rationalized the NSC again and reinstated the process for the President to make the decision.” What about heavily
cautioning this adolescent with a new set of bomber keys about drinking and bombing? Mattis and McMaster need to
understand that their tenure is unique in American history, and that if they allow a completely inexperienced president to
make foolhardy choices they will damn the military again for a couple of generations.
Given our poor history with wars over the past 50 years, there will be even less patience than in the past. As these
civilian generals well know, the public’s half-life for “Shock and Awe” continues to diminish with each failed war. “Shock
and Awe” doesn’t work on determined opponents. The press won’t oblige Trump with any room to maneuver, but will
crush him when their trap is set, particularly when this conflict:
• supports no vital American interests;
• has never been vetted by any kind of cynical press;
• has never been approved by Congress;
• has never been taken to the people;
• has no strategy for the conduct of operations; and
• has no exit strategy.
I could go on, but you get the picture.
So, what exactly are McMaster and Mattis doing?
The press still despises President Trump for exposing their bias and their incompetence in reporting, despite his
attempts to show that he’s a good guy. The civilian general advisors won’t, like McNamara in Vietnam, be able to provide a
good exit because an insecure Trump won’t want to take the heat of a failure, just as an insecure President Johnson didn’t
either. So, as normally happens, we will throw more troops at the problem and potentially be involved in a Middle East
conflagration, to the delight of McCain and chicken hawk Lindsay Graham. Most likely, Goldman and the Boyz could even
come up with the old narrative that claims: “War is good for the economy.” Back to 1984.
Two difficulties that feedback systems have is dealing with receivers of erratic sensitivity or transmitters of erratic
transmission power. Normally, a system with these characteristics gets redesigned or is replaced with one that is more
consistent. In Trump, we appear to have both today. During the campaign, Trump seemed to be insensitive to the press
and negative feedback, and sensitive to his base. Now this appears to have reversed, but also on the transmission side.
Unlike Reagan, who stuck to his guns for a couple of dark years, Trump couldn’t handle it even for the first 100 days. His
insecurities appear to be getting the best of him, with the help of the press. It is quite likely that his New York advisors are
telling him to dump the “deplorables,” and go with the status quo, because there is less downside. A highly placed New
York investment banking friend of mine mentioned he was concerned that now almost no one has any idea what President
Trump will do next. This vacillation between no feedback and excessive feedback is confusing. Despite Wall Street claims of
what Trump will do, business decisions are likely slowing or stopping because few people have any idea about what Trump
intends to do, and whether he will actually do it, since he starts and stops with amazing alacrity. A program plan can last
only as long as Trump’s next Tweet. With strategies being countermanded, or contraindicated, there is no direction.
Trump’s concern for his image, or “brand,” has led him to another problem: nepotism, as his brand-obsessed royal
kids are freaking out at their potential loss of market share — yet another feedback loop gone awry. Nepotism, outlawed in
many companies and in most law firms, allows people with little ability or experience to rise into positions that can put an
entity at risk. In short, they are lousy control systems, because they don’t understand the feedback they are receiving. One
of the few good examples of nepotism is Thomas Watson Jr. of IBM, who worked his way up the ladder under his task-
master father. A distinctive difference between Thomas Jr. and the royal Trumps is that Thomas Jr. got completely out from
underneath his father during the Second World War, when he was in the Air Force. That he dedicated his autobiography
to the general he worked for indicates how important he considered this period of his life.
Most children who follow their parents directly are degenerative, because the children haven’t learned or had experience
enough to handle the position. This was one of the problems that caused Americans to rebel against the English monarchy.
It is ironic that President Trump wants to fight the totalitarian countries Syria and North Korea, both of whose leaders
inherited their positions from their fathers, much to the detriment of their countries. Kim Jong-un, the third family
successor, shows how far bad can go to worse. His father was incompetent, and now #3 is crazy, out of control — so much
so, that even China is concerned. While it is doubtful that either Prince Jared or Princess Ivanka will ever ascend to the
presidency after a likely one-term Trump presidency, they currently create yet another feedback problem often heard in
screeching audio systems during concerts — a shorted feedback system that feeds back all the same information that was
transmitted to it in a circular loop.
The young royals have almost no experience beyond real estate and “brand building,” and even less real-life experience,
particularly with the “deplorables” which to them (and Manhattanites) are probably the “abhorables.” Neither royal has had
“skin in the game,” as the term is used by both MGEN Dennis Leach and Nassim Taleb. In his book of the same name,
Leach shows the problem as deriving from the lack of shared sacrifice across the classes in war. This leads to poor decisions,
because only a small percentage of the population truly serves its country and the rest just don’t care. It’s not their kid, or
even their neighbor, who is at risk. Taleb demonstrates the same thing in finance, where most of those working in finance

May 2017 The Gloom, Boom & Doom Report 19

aren’t risking their own money and so have no “skin in the game.” Jared Kushner and Ivanka personify both problems.
Neither of them has ever come out from under the protection of “Daddy’s money” and done something truly on their own.
No one in the family has served their country in any capacity. Both went to schools where their father either attended or
made a large donation. Both went to work in the family business and didn’t stray, except when Daddy moved to the Oval
Office, whence they followed.
On his first outing just out Harvard, under the auspices of Mommy’s and Daddy’s money, Jared Duke of York, the New,
made what would be for most people a career- and fortune-ending deal for his family company: he bought 666 Fifth Avenue
in 2007 for $1.8 billion, and heavily leveraged it at the top of the market. This, just as wily old fox Sam Zell was selling off
Executive Office Properties. After the crash, Prince Jared couldn’t cover the debt service and was forced to sell the retail
portion of the building. I am told this building is still underwater 10 years later. Many readers of this publication could see
that train wreck coming, but not Prince Jared with his newly minted Harvard cum laude. If he were to appear somewhat
humble or thoughtful, one might think that maybe he learned a lesson, but the Fed’s reflation saved his keister and New
One must wonder if Kushner is an appropriate person to make similar first-time recommendations without any
underlying understanding or relevant experience. Where is the “skin in the game”? According to Fortune, Ivanka’s “brand
is inescapably linked to her father’s.” So, this “brand” must be the royal’s “skin in the game.” Anything unpopular in our
politically correct world will distress Ivanka for her brand. Her concern with women’s issues is also likely wrapped up with
her brand management. One might be tempted to conclude that the “brand” is all she really has, since her business does
significant reselling of others’ products and she has been accused of copying others’ designs.
At a time when the employment-to-population ratio is back to where it was during the recession in Reagan’s first term,
families need good jobs for their kids more than anything else. Birth rates are falling because couples can’t afford to have
kids, not because they are missing pregnancy leave. Yet, Ivanka appears to be pushing leave issues and equal pay for women,
whatever that really means, with no understanding of the unintended consequences. There are probably more families and
women with no jobs, where equal pay and pregnancy leave are meaningless issues, than there are employed women who
can afford to buy lots of Ivanka’s shoes and handbags while on that leave. So, who does brand-obsessed Ivanka care about?
Flyover country that can’t afford her stuff, but which voted for her Daddy; and the coasts, which didn’t vote for Daddy but
are her target market. In this context, Trump’s flip makes sense. Maybe Princess Ivanka wants these flyover families to just
“eat cake.”
What could be worse, however, is if Ivanka’s input on national security issues to her father is still tied up with her
ideas of what is good for her brand. Could it be that potential handbag and pump sales are the “go–no go” determinant
for bombing runs? With such a concern for “brand” and a background of “reality TV,” one might conclude that the royal
Trumps are just Manhattan’s and politics’ answer to Kanye West and Kim Kardashian.
Cheap money for the Kushners’ and Trumps’ real estate assets are another area where the “deplorables” lose out and
the royal couple do just fine. When the “deplorables” couldn’t make debt payments on their homes, did they have Jared’s
It is unfortunate that Trump has allowed the media to drive a wedge between him and Bannon (according to the
New York Times) and the base that Bannon represents. Trump is already getting flak from many conservatives across the
spectrum, including Reagan’s Peggy Noonan, Pat Buchanan, Laura Ingraham and Ann Coulter, while RINO Morning
Joe, whom Trump enjoys watching, we are told, has become enamored with Trump. If Bannon and the base he speaks
for gets dumped, Trump punts the majority of his voting bloc that got him to the White House. These are the ones that
passionately ran most of his ground game and clamored for him at rallies. This group includes those that stayed home
during Romney’s run. These supporters are loyal, but only if their president stays loyal to them. They are now skeptical and
likely to adhere to Gomer Pyle’s adage, “Shazam! Fool me once shame on you, fool me twice shame on me.” The press,
the RINOs, the Democrats will never give anything more than lip service to the President. Even his New York buddies and
Goldmanites will dump him in a New York minute.
Trump’s Achilles heel is his constant need for adulation and reassurance. It shortens the time horizon in which he can
work. Certainly, that time horizon will be exceeded by any conflict he might get into, by any debate on a contested bill, by
an economic downturn that is long overdue. Soon the President could be a man without a constituency or even a party —
much like President Tyler, who was abandoned by his party during his presidency.
Shania Twain sings that you dance with the one that brought you. It would help the President if he remembered that.
In an economic downturn, and certainly a crisis, Trump would invariably print money with the best of them. Expect
Janet Yellen to be retained as Fed Head. But how much longer can the US — and the world, for that matter — continue
to rely upon money printing before investors and consumers switch from financial assets to real hard assets? If this were
to happen, inflation — or reflation in the wrong assets — would surge. In that situation, investors and Trump should
remember the near bankruptcy of New York City during inflation in the mid-1970s and how badly the Kennedyesque
Republican-turned-Democratic mayor John Lindsay fared in that environment. Trump’s New York friends wouldn’t and
couldn’t save him in a difficult time.
If Trump loses the confidence of the base, his administration will look more like Nixon’s second term. That was terrible
for the stock market. It’s doubtful that Trump would get impeached, but his popularity would turn to a record low. It would

20 The Gloom, Boom & Doom Report May 2017

be ironic for Ivanka that if Trump continued to dump his base, he would show that his “brand” had no clothes, pumps, or
Certainly, the bloom is off the rose with regards to the Trump reflation, and now we have an obvious huge bubble
in real estate, stocks, junk bonds, bonds, the dollar — everything but precious metals, emerging markets, and maybe
temporarily in government bonds. Not only is the current financial situation worse because of the continued debt growth
and the weakened state of businesses and individuals, but also the bubbles have done more internal damage to companies’
operating philosophies and focus. Markets are putting billions into companies that are not profitable, and will never be
profitable, because of huge debts and arrogant, dishonest leaders. Too many companies, like Ivanka, are worried more
about “brand” and hype, and less about fundamentals. The Fed can probably keep the economy afloat with a concerted
printing, but the buying power of individuals and families will continue to erode as health-care costs continue to rise
along with housing costs, while consumables would replace financial assets as those that are inflating. This would hurt
consumption even more. At some point in the near future, the money printing will bypass the formerly hot companies and
go instead into real assets such as precious metals and food, and likely into basic companies in emerging markets that aren’t
overinflated. Once this occurs, Humpty Dumpty won’t be put back together again. At that time, printing would only serve
to increase the prices of these inflation-sensitive products. Some companies like UBER, SNAP and TSLA would likely go
out of business when their sales line decreases. Note the problems that portend with Uber’s down financing round. In a
hyper-stagflationary world, food and shelter (at a decent cost) would trump just about everything else — even Trump.
On Breitbart a year ago, reader comments were rabidly for Trump. Today, except for crazies and those whose only focus
is killing ISIS, the comments are slowly turning against him. The most telling comment from a doubtful supporter was:
“Trump isn’t as bad as Hillary, but he’s working on it.”

May 2017 The Gloom, Boom & Doom Report 21

© Marc Faber, 2017

DISCLAIMER: The information, tools and material presented herein are provided for informational purposes only and are not to be used
or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or
other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other
financial instruments. This research report is prepared for general circulation. It does not have regard to the specific investment objectives,
financial situation and the particular needs of any specific person who may receive this report. You should independently evaluate particular
investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any
securities mentioned in this report.

Author & Publisher Subscriptions and enquiries

Unit 801, The Workstation, 43 Lyndhurst Terrace, Central, Hong Kong
Research Editor & Subscription Tel: (852) 2801 5410 / 2801 5411 Fax: (852) 2845 9192
LUCIE WANG E-mail: luciew@biznetvigator.com; Website: www.gloomboomdoom.com

Copyeditor Design/Layout/Production
E-mail: robynfle@gmail.com E-mail: pollyu1962@gmail.com
Website: www.robynflemming.com.au