Morgan Creek Capital Management
Comment of the Day

March 22 2019

Commentary by Eoin Treacy

Morgan Creek Capital Management

Thanks to a subscriber for this report which may be of interest. Here is a section:

Eoin Treacy's view

Here is a link to the full report and here is a section from it: 

Repeating what we said last time, “We continue to see increasing evidence that the negative trends related to the Killer Ds (bad demographics, too much debt and persistent deflation) are accelerating again within the Developed Markets; therefore, investors should be prepared for a decade of below average returns (likely 3% for bonds and closer to 0% for equities).” We also discussed last quarter how the real problem for investors today is that the path to a long-term return of zero for equities will likely consist of a steep drop during the first five years (order of magnitude, down 40% to 50%) and a subsequent recovery over the following five years. We are not convinced that the nearly (20%) drop in Q4 was “the big one” and just like 2001 had three 20% rallies on the way to losing double digits for the year, we expect 2019 to follow a similar path. We still contend that the next decade will resemble the 2000 to 2010 period (or worse, the 1930 to 1940 period, #WelcomeToHooverville) and while we don’t see a repeat of the Global Financial Crisis (not as much leverage in banking system) we still see 2018-2020 looking very much like 2000-2002 (2018 was awfully close to 2000 already). In that type of challenging investment environment, focusing on margin of safety will be the key to preserving and growing capital, in other words, the return of Value investing.

I spent today at the American Association of Professional Technical Analysts conference which is a forum a I enjoy where market veterans share what works for them. Scott Fullman reported today that he was at a fundamental research conference from Emerald Research a few weeks ago where they opined that only about 10% of trading today is based on pure fundamentals.

In the momentum driven markets that have prevailed since the advent of extraordinary monetary policy, value has not been working because there has been such high correlation between the markets of all hues. That suggests in order of value to begin to deliver the kind of returns it has historically, there is going to have to be a clear change in the texture of the market. That entails and end to quantitative easing.

If anything there is a likelihood we are going to see an amplification of quantitative easing as a response to the maturing market profile. What does look likely is private equity will successfully take some of the most prize assets out of the public markets.  Global monetary and fiscal policy is moving back to an expansionary footing while the bond market is pricing in a contraction. That, of course, suggests now is the time to be most diligent with stops.

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