Trends Watch: III Macro's Head of Research Gives Global Macro Outlook

May 16, 2019

By Elana Margulies-Snyderman 

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Michael Storm Jeske, Head of Research, III Macro.

What is your outlook for the economy?

We believe investors should think about the last 10 to 20 years holistically, with the last two years being critical ones. In our analysis, we link together the broad global asset class losses of 2018 with the deep lows hit in the February 2016 risk-off moment. 

Seeing it this way—the recent period is then not a long bull market ready to roll, but, in fact, quite the opposite. Very few have noticed that many major markets/securities were significantly lower in February 2016 than in March of 2009. Wow! This list includes oil, the CRB commodity index, the Euro and the Ruble, both Brazilian FX and Bovespa stock index, and so on. All hit lower levels than those of March of 2009.

Following on those 2016 market lows, generally we see last year, 2018, as a 2008-style year.  We, thus, expect this V-shaped recovery to continue and move into a completely renewed long upcycle.

We see the risk-off moves in 2018 as scared or silly driven by (a) bad policy, both from the Fed and economic nationalism; (b) the bursting of the speculative bubble in crypto assets—both Bitcoin and Blockchain tech; and (c) various follow-on effects, such as in chip stocks.

I hope these seldom-cited market facts help support our view that going forward we see a completely renewed up-cycle. And we favor U.S. stocks and believe deeply in stock selection (our own work and client funds teams often have equal 10% alpha on longs and shorts).

What is your outlook for alternatives?

So, alternatives is a very broad category. I hold real skepticism that real estate and traditional private equity industrial stalwarts can deliver going forward, as global competition increases against a weaker demographic backdrop. Of course, they have massive tax and structural advantages, but those gains could see more intense scrutiny as fleecing pensions and outsourcing jobs become less palpable. Further, Internal Rates of Return (IRRs) have always been somewhat fake returns to actual investors who realize far less on a fully committed basis.

I have focused my career on single-fund hedge fund firms, nearly fully liquid, with double-digit long-term results in all cases since 2006. I think the overall performance of liquid long/short equity, quant, and macro hedge funds is near completely misunderstood. Investable hedge fund indices are impossible, and investing early in a single true star can make an entire alternatives portfolio. Sophisticated investors understand this, and some of the best hedge fund consultants have truly outstanding results (double-digit net in 9/10 years and average for 20+ years).

I think we are entering a golden age of alternatives and especially long/short equity and macro investing.

What keeps you up at night?

Not that much. I don’t write Hollywood-style risk management scenarios.

Consider the S&P500 is up 75x since 1980. Wow! Now imagine if one can select a few good stocks. Wal-Mart? Microsoft? Maybe make one or two good macro or sector transitions. Those choices can really amplify the 75x (11.7% annual) returns.

Silly pricing in markets creates lots of opportunity and is to be expected and leveraged.  Furthermore, consider that down periods in markets or economies are typically followed by strong bounces. I believe buying the dip will continue to work, and prosperity will grow long-term. I am not much for doomsday-type scenarios.  Remember, we hear these echoed throughout history. It turns out that the world is ending has always sold very well.

The biggest new thing we confront today is a huge change in global demographics. We are quickly growing more peaceful, wealthy and aging as a society. Are we going to handle this transition correctly? 

For example—we see slow growth numbers largely due to this demographic transition. We target 2% inflation, but the entire globe has been under-hitting that mark for decades now. This favors the low-risk saver over growth and risk taking. Japan favored the low-risk assets too much, and that has long-term influence on the psyche and habits of a whole country. 

This is true in simple headline economic numbers. For example, U.S. Core Personal Consumption Expenditures (PCE) inflation has averaged 1.7% for 25 years. But we see this more deeply in underdeveloped careers and families as well as debts that are hard to pay.  Remember—higher inflation makes student loans and mortgage debt (or any debt) easy to pay.  Finally, I believe we are getting the inflation measure wrong due to magical technology like free global video calls, airbags or generic Viagra.

We would benefit from a 3% annual inflation target and continuing to modernize the ways we calculate inflation, such as was done under Greenspan in the 1990s, to account for the magic of technology. I worry that if we get this wrong we will continue to operate far below our potential as a global economy. In short, I worry about sliding into decades of debt-deflation malaise. Are not Europe and Japan both trying to escape this exact mistake?

About Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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