Mauldin Strategic Investment Conference 2019 (Part IV – Felix Zulauf) – ValueWalk Premium

Mauldin Strategic Investment Conference 2019 (Part IV – Felix Zulauf)

“Optimizing learning and instruction often requires going against one’s intuitions, deviating from standard instructional practices, and managing one’s own learning activities in new ways.” – Dr. Bjork #TOVOInstitute #Intelligent #Training

Q1 hedge fund letters, conference, scoops etc

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The greatest bull market of all time began in 1982. Then, a young Felix Zulauf, global strategist at the largest bank in Switzerland, did something few would do, he aggressively positioned the bank’s clients into a 65% weighting to equities. An unheard-of level at that time. Remember then, bonds were yielding in the mid-teens. A bold call. The right move. In mid-1987, he was in charge of the bank’s institutional portfolio management department. After an outstanding start to the year, he suggested to his investment committee a reduction in their clients equity exposure from 65% to 50%. The investment committee agreed with Felix but senior management at the bank rejected the decision. Felix, as he puts it, was “very pissed.” He said, “He was 37 and thought he knew everything.” So, he decided to make a point and ordered all of his portfolio managers to go zero percent equity exposure. Sell everything!

He explained to his team that he was expecting a 25% correction in the coming six months, so they began selling their clients’ equity exposure. By October 19, 1987, the day of the market crash, the bank’s clients were 100% positioned in cash. As you might imagine, Felix was on shaky ground with senior management. They blamed him for doing “something stupid,” etc. He was reprimanded in front of his team. At one point, he stood up and told his bosses they lacked the character to be his boss. Word went around in the bank, then throughout the city and everybody knew that Felix was extremely bearish and general management was on the other side.

When the crash arrived, he was personally very happy because he “shorted” the stock market (betting it would go down) in his own investment account. As he put it, he was “Up to my eyeballs and on margin.” The warrants he shorted went down 80%, which meant Felix made a huge profit. He said, “So I was very happy but I knew my career at the bank was over.” He had positioned the bank’s clients in cash because he felt, as a fiduciary to the clients, he had an obligation to them. That too felt good though he learned that some clients were angry and actually bought for themselves the very assets Felix sold. Bad move.

Deviating from standard instructional practices  

Grant Williams moderated the Felix Zulauf session at last month’s Mauldin Strategic Investment Conference. Grant asked Felix, as a manager, “How do you go through with having the courage of your convictions. This “fear of missing out phenomenon” is everywhere today… how do you sit down, analyze the markets, be cold and calculated about it and come up with a plan? And no matter how outrageous it seems, how do you go through and execute that plan?”

Felix answered, “Today you couldn’t do that. Organizations and compliance were not as rigid then as they are today and you had more freedom as a manager. I also don’t know anyone else who did such an extreme move, within a large organization, as I did. Today, it would not be possible. If I had a 37-year-old in front of me today feeling the same as I did back then, I would recommend to him he not do it.” Bad for the career, even if you are right. Unless you are able to raise hundreds of millions of dollars and start your own fund.

Great investors just seem to have it in their DNA. The ability to go against the crowd at points of extreme. And Felix is one the greats. If you are not familiar with Felix, he was a member of the Barron’s Roundtable for almost 30 years, was the owner and president of Zulauf Asset Management, a Zug, Switzerland-based multi-billion dollar hedge fund, which he founded in 1990 and now runs it as his family office.

I mentioned to you a few weeks ago that one of the things I like best about the Mauldin conference is how John positions his speakers amongst peers. Views get stress tested and it really causes one to think. To which, I also share with you and intro (and then link) to the panel discuss with George Friedman, Jim Mellon, Felix Zulauf, Louis Gave that followed Felix’s session. Also, outstanding.

So grab that coffee, find your favorite chair and read on. Today the series continues. You’ll find a quick summary review of Parts I (Lacy Hunt), II (David Rosenberg) and III (William R. White) and then my high-level summary notes from the Grant Williams-Felix Zulauf discussion. Felix shares his views on what he sees ahead and how he is personally positioned. I do hope you find the information helpful.

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Included in this week’s On My Radar:

  • Mauldin SIC 2019 – Summary of Parts I, II and III
  • Mauldin SIC 2019 – Part IV (a): Felix Zulauf’s Investment Outlook
  • Mauldin SIC 2019 – Part IV (b): The Future of Europe: Will the Euro Exist in 2030? Panel Discussion of George Friedman, Jim Mellon, Felix Zulauf, Louis Gave
  • Trade Signals – Extreme Pessimism Suggest S/T Rally, Equity Trend Signals Weaker Yet Bullish
  • Personal Note – Women’s World Cup Soccer

Mauldin SIC 2019 – Summary of Parts I, II and III

Before we jump into Felix Zulauf’s presentation, let’s take a quick look back at the last three letters, which highlighted Lacy Hunt, David Rosenberg and William R. White.

Part I: Lacy Hunt, Ph.D. – What’s going to happen?

  • I [Lacy Hunt] think we are going back to zero bound (Fed Funds rate to zero percent). Because we expect velocity to fall and we are concerned that we will be stuck in a quagmire with a zero percent bond for some time. Yield curve will be a lot flatter. His fund has greater than 20-year duration.
  • It will be ugly economically.
  • We are not going to get growth. We are not at the end of the declining rate cycle… we haven’t seen the low in yields. He favors investing in long-term government bonds for total return.

Part II: David Rosenberg – What’s going to happen?

Rosie argues that recession is coming, rates are heading lower and we will move to even more unconventional Fed policy. He recommends the following asset classes will outperform (see next chart) and suggested that the 10-year Treasury may earn a total return of more than 11% over the coming 12 months. He also likes quality dividend payers and going long volatility. For non-geeks, that is a bet that volatility will pick up to the downside (it will get very bumpy) and a way to play that for profit is to invest in the VIX. My dad would say, a play that is “not for the faint of heart.” He sees a future “Debt Jubilee” where debt gets monetized somehow. Then inflation.

Part III: William R. White – “In the end the only way out of this mess is inflation.”

Bill says the central bankers’ policies are fundamentally flawed and their flawed theory has led to flawed policy, both before and after the crisis the last crisis, and he believes that their flawed policy is going to lead to the next crisis.

He said we’ve had non-inflationary boom and, in the next crisis, predicts we are going to have a “debt deflationary bust, but what that might morph into is high inflation or even hyperinflation.”

The Fed’s (and other central bankers) capacity to respond is now significantly reduced.

  • Last time, interest rates were much higher. Now the interest rates are pretty close to zero in most places, are actually negative in many others.
  • The size of the balance sheets are much larger: In the United States, the Fed’s balance sheet is 20% of GDP, in Europe, the ECB is 40% of GDP, in Japan, the BOJ is 100% of GDP.
  • There may still be room but it’s going to be much more limited room due to the degree to which sovereign debt ratios in the advanced countries have ballooned — incredible.

And this: The Fed’s “Crisis resolution tools are inadequate.” The last time around, the central banks reacted in the right way. Now, “Dodd-Frank has got six separate provisions in it that will prevent the Fed from doing next time what they did the last time.”

  • When you get a crisis, there are three phases. There is crisis prevention, then there is crisis management, then there is crisis resolution. Crisis resolution comes down to — we’ve got a big debt problem.

Bottom line: The debts are going to have to be restructured, written off, whatever and then we move on.

  • So, all I can advise to you, as you sort of think your way through (the outcome I see) first the deflation and then maybe the inflation, is to also put a lot more emphasis on the geopolitical stuff, because increasingly, that’s where the action is going to be taking place.
  • But since it’s an unhappy story that I’m telling today, I guess the only thing I can finish with is – good luck. You’re probably going to need it.

Mauldin SIC 2019 – Part IV (a): Felix Zulauf’s Investment Outlook

If you prefer, put on your sneakers, plug in your headphones and go out for a walk. You can listen to the full presentation via podcast here.

Following are my notes on Felix’s discussion with Grant Williams.

GW: What are you bearish about and what are you bullish about today? You do have this reputation of being a “bear” but you and I both know you are bullish at times and bearish at times. So when you look around the world today, what are you bullish about and what are you bearish about? What do you see today?

FZ: When I look at markets, I first start to create a long-term big picture. I look at structural trends in economics, in demographics, in politics, etc. etc. And then I try to analyze the business cycle and were we sit in the cycle.

  • What is not well understood today is demographics. I do not know of any econometric model that factors demographics into the model. They should be. I don’t know why. They have their models and they do not adapt.
  • Some numbers… When you look at the OECD-member countries plus China, Brazil and Russia and you look at the age group of 0-64 year-olds, that age group was growing by 25 million every year from 1950’s to early 1990’s. Since then, that number has been declining. It was down to 14 million in 2008, the last time we had a crisis. Last year it was down to zero growth. This year will be the first year it is negative at -1.7 million and it goes down to -12 million (estimate) by the year 2030. And then it stays there until the early 2040’s. So that’s the demographic picture.
  • Lacy Hunt gave a great lecture about productivity and he explained why productivity is going to remain depressed.
  • Economic growth (GDP) equals Productivity times Population Growth (demographics). When you take these two factors together, we will not see a lot of growth.
  • Our economic system is built on growth. We need growth for the system to survive. So, when the pie doesn’t grow much, all of a sudden you have to fight for market share, and that’s what comes up in trade.
    • First, one starts cheating with currency manipulation, then you set your products up in a way that benefits the local producer and then finally you have tariffs. That’s where we are today, and this will get worse and worse over the next 10 years.
    • That’s why we have entered the period of rising conflicts in trade and in geopolitics. This is compounded where a dominating power is challenged by a dominating power being challenged by a rising economic power who also has a strong military – that’s China and the U.S.
    • Over the last 500 years, we’ve had 16 such cases of which 12 ended in outright war, there were smaller wars (like Korea, Vietnam…) and one was a serious war (between Great Britain and the U.S.). So, we are moving into that sort of environment.
  • Then we come to the business cycle. Many people believe the problem in the economy is coming from the trade conflicts, but this is not true. I saw the slowdown coming in late 2017 and put out in my publication to my clients and expected slowdown into second half of 2019. And we are pretty much on track.
  • The tariff and trade problems are just compounding the slowdown we are seeing.
  • The slowdown is a result of overtightening in the U.S. and overtightening in China (because they have to restructure some of the excesses in the financial sector – they realize they can’t go on like this or they will run into even more serious problems).
  • We have a classic slowdown in the world’s two major economies. And Europe heavily depends on China. Half of its growth over the last 10 years came from China directly and indirectly.
  • The slowdown should eventually impact markets.
  • This whole rally from the December low is over.
    • On December 27, I sent out a report to my clients saying this is the low. Before that I warned this is not the low, don’t buy yet.
    • Then on May 2nd I sent out a note “new sell signal.” I think we have started the second decline in this bear market that was interrupted by a nice rally.
    • I call that rally a mirage. An optical illusion where what you see appears close is really far away or does not exist at all.

GW: Demographics matter. These are trends that take a very long time. Why do you think people have such a hard time at building these long-term time frames?

FZ: Our industry says they are long-term oriented, but they are really short-term in behavior.

GW:  How have you had to adjust for the business cycle since every time you get a downturn in the cycle the central bankers throw all sorts of new things at it to keep the cycle going?

FZ: Well, this business cycle is very different from all the previous cycles. It is managed and some of the factors you normally see show up late cycle we don’t see showing up. We heard (Liz Ann Sonders from Charles Schwab) say it is late cycle. But in late cycle you have profits booming and you have inflation. We don’t have that because of structural factors like demographics, like excessive debt… therefore, it is a completely different cycle. And the formula that worked well in previous cycles does not work well.

  • We have lack of demand for growth and we have excess capacities and we have excessive debt. So the risk is different than in previous cycles.
  • In previous cycles, it was a classic inventory cycle or we had a real estate cycle.
  • This time we have a “credit cycle” with excesses in the credit markets. And where you have the biggest excesses, you have the biggest risks in the downturn.
  • Most investors think that when the economy turns down you then get a stock market decline. It’s actually in reverse. The stock market declines and then you get recession [SB here: See Trade Signals – one of my favorite recession watch charts is the “Economy and the Stock Market.” Stocks lead the economy, they don’t lag. Particularly, watch the trend in the HY market, which leads the stock market, which leads the economy.]
  • The recession will probably hit when the stock market reaches its low.
  • The credit excesses are most extreme in the corporate Emerging Markets. China is a big part of it. So it is really important to watch what the dollar does.
  • The U.S. should start to weaken the dollar right now. Because if you weaken the dollar, the pressure on those in EM countries will get relief. Otherwise you are strangling those borrowers even more. And the refinancing that is coming up ($180 billion right now) adds to the pressure. We are in a very dangerous situation.

[Side bar: SB again. There is roughly $9 trillion in EM debt borrowed in dollars. A rising dollar means the EM borrowers have to pay back more. Dollar up 20%, the amount that must be paid back is $11 trillion. Imagine you took out a mortgage for $1 million from a European bank and financed it in euros, not dollars. You were happy to get the loan and you felt the euro would decline in value against the dollar. You were making two bets. One: you hope the price of your house goes up and two: a currency bet. You have to pay the loan back (monthly principal and interest over say 15 years) and if the euro goes down, your dollars are worth more. Say the euro goes down 10%, you pay back the equivalent of $900,000. But if the euro goes up, you owe more. Up 10% and you owe $1,100,000. You can see how a higher dollar will hurt the EM corporation who borrowed from U.S. investors. Bankruptcy? For some it will happen. That is why Felix is saying the U.S. should depreciate the dollar to prevent crisis. That may or may not happen. Either way, the amount of debt (leverage) is the problem.]

  • So far it seems like the Fed doesn’t get it. Some people think they have changed from tightening, but they have changed from tightening to tightening less. They are still draining liquidity from the system. [SB here: Though that story is rapidly changing…]
  • Others are very expansive: EU and Japan.
  • S. is key here. If the Fed weakens policy quickly and weakens the dollar, we could have an extension of the business cycle. And that will be an investment decision I will have to take in the second half of this year. Depends on what they do…
  • This decline we are seeing in the stock market will run into the second half of the year. We will have a medium-term low between August and October and then a meaningful rally. And if the central banks begin to ease, led by the U.S. Fed, then you could have another big rally maybe back to the highs or even slightly higher in some markets into 2020. Which would play into the hands of Mr. Trump.
  • If they do not ease, we will have an ongoing bear market. But bear market from 2020 on will be a very different animal than the bear market we had in 2008. Usually, people look at what happened last time and they project that forward. What happened last time will not happen. Maybe what happened before last time is more likely.
  • I don’t think we see a waterfall decline; I think we are in for a multi-year bear market with large swings in the stock markets. We live in a time where authorities will come in and they will buy stocks, they will buy the market and you will have a very volatile environment.
  • When you look at our starting point today with very high valuations and very high equity ownership, all you can expect over the next 10 years is the dividend yield.
  • We do not go flat-ish, we get wide swings with no progress and you just end up earning the dividend yield.
  • This is very different from the environment over the last 10 years. You could have been a passive index investor where you buy-and-you-sit-and-you-hold and that game worked marvelously for you. I think that game is over. I think you have to be a market timer to play the medium-term swings… the mini cycles I expect. And you have to be a good picker of stocks and sectors. Because what will be lacking is economic growth and profit growth.
  • We will have margin squeezes in the corporate sectors due to social pressures. More of the profits will go to the workers and less to the shareholders. The share to labor will go up so you have a profits margin squeeze.
  • And when you have a lack of profit growth, you need to pick sectors and companies that will have profit growth.

GW: What are the ramifications of this… this move from passive back to active? The move we saw a number of years ago from active to passive was an easy transition to make. Everyone can become a passive investor. Not everyone can become an active investor. What are the implications of this?

FZ: The starting point today is you have no market timers anymore. Marketing timing has been completely discredited as a strategy. I’m one of the last remaining. And active managers have failed. You need different talent and that talent is tough to find. Either they are too old, like me and my colleagues, or you need young talent who is passionate and desires to pursue active trading.

GW: Some questions from the audience. What is your current asset allocation look like and what do you think of gold?

FZ: The way I run my money is I have different pillars.

  • A pillar for commodities, which is mainly precious metals, mainly gold. I have a pillar that is fixed income (and cash), I have a pillar that is individual equities (the core positions do not change very much) and I have a pillar that is commercial real estate.
  • My biggest pillar right now is fixed income.
  • And each pillar I can then go into the futures market. I can hedge my exposures, or I can go 200% long or I can go 200% short, so effectively I am net 100% short in any of my core pillars.
  • So, I have a portfolio that is relatively static, and I can go into the futures market and work around my positions.
  • My biggest position is U.S. long Treasurys. That is where I have the most conviction.
  • I was net short equities but went flat when I came to this conference. I don’t like to be short when I’m away. The next uptick in the market, probably in June, I will use the uptick to get net short again. Probably short the U.S. market. Though I will take a look at shorting the Australian banks after sitting in on your [Grant Williams’] presentation. [SB here: I’ll review Grant’s presentation in a future letter.]
  • I’m long gold. We are due for a medium-term rally. It will depend on what the Fed does. It will determine if the rally is fake or not. I expect a breakout above the $1,370 level. And then you could get another $100 or so very quickly. And if the Fed does not move as decisively as it should (QE, rate cuts) it is a fake break-out and it will go lower again. If they do move then it could build further and go higher. I remain flexible.

GW: The Fed has been able to jawbone the market and get the rally. This time it felt to me like they were trying to weaken the dollar. Have they lost control of the dollar?

FZ: I don’t think they have lost control. I just don’t think they understand markets and they make mistakes at the turning points. They are married to their (flawed) economic models.

  • I don’t think they have lost control.
  • The central banks will get even more powerful. Not in the effect they have on the economy but the effect they have on the markets.
  • They will continue to print. But the economy is in a position, a condition, that cannot take that money to create growth. It is simply not in a position to take that money (too much in debt).
  • So, money will go into markets to inflate asset prices.
  • And they, unknowingly, have widened the rift between the haves and the have-nots.

Grant asked Felix about the Swiss National Bank (“SNB”) and its desire to prevent the rise of the Swiss franc due to the nonsense that Draghi is doing in the EU (which is causing the rise). Felix answered:

  • There was one day when the SNB stepped aside from intervening and the Swiss franc rose 20% that day. So the Swiss are printing and selling francs and buying dollars and buying stocks to keep the franc from rising, which would kill the Swiss economy (price of goods too high).
  • The SNB has increased their balance sheet by 15 times and they are one of the biggest holders of U.S. stocks, owning some $200 billion.
  • They are one of the top 10 holders of every stock that makes up the S&P 500 Index.
  • If you would have told me this 20 years ago, I would have thought you were not from this planet.
  • Every year I meet one-on-one with the president of the Bank. We talk openly and candidly. I meet with him next month.

GW: Question from the audience: The vast majority of speakers at this conference are generally bearish, which I agree with. My question is that generally the vast majority are generally wrong. Do you have an opinion on this?

FZ: I don’t think that the market is bearish right now, but they are wrong at turning points. They are generally right for much of a trend. I pay a lot of attention to sentiment indicators and to investor positioning to get a feel for where we stand. When the positioning gets very one-sided, when everyone runs this way, I run the other way.

GW: We have one last question from the audience. What is your short- to intermediate-term outlook on Emerging Market equities?

FZ: I think they will decline more than developed market equities. Into the low I was describing into August to October of this year. And then, depending on whether we get an extension of the cycle (from the Fed/central banks) I like EM equities for a bullish six, nine- or 12-month rally (due to their higher beta).

  • I would not go overboard because I’m more risk-averse at my age then I was when I was 37.

That concludes the panel discussion. I’ll add that with 75% of the self-directed wealth in the hands of pre-retirees and retirees, I think most of us feel like Felix. Factor that and probable behavior, into your demographic thinking.

We sit late cycle indeed. Do take a look at the intermediate-term indicators in Trade Signals. They may help you navigate the up and down swings Felix (and I) foresee ahead. None are perfect but all are good. Diversify to trading strategies… Absent my personal biases, I believe it wise to listen to what Felix, and Rosie, Hunt, White, Dalio, Druckenmiller and Mauldin are saying. Smart and experienced money managers with similar views. Keep your head up… For now, more defense then offense. Better entry points ahead.

Mauldin SIC 2019 – Part IV (b): The Future of Europe: Will the Euro Exist in 2030? A Panel Discussion of George Friedman, Jim Mellon, Felix Zulauf, Louis Gave

I encourage you to sign up to receive the video, text and charts from all of the presenters at last month’s Mauldin SIC. I attended most sessions but had a conflict listening to the panel discussion I provide you next. Watching the video is interesting as you can pick up on body language and tone when views are tested. You can sign up at Mauldin Economics here (note – I do not receive any compensation whatsoever).

Here is an intro to the panel discussion with Friedman, Mellon, Zulauf and Gave. Read on and if you’d like to read the entire transcript, I provide you with a link below. Friedman talks geopolitics and he has an inside view. Follow his thinking and watch how it intersects with investment positioning and the forward macro outlook. Zulauf you now have a feel for… Mellon and Gave are brilliant. Here you go:

Moderator: Grant Williams

GRANT: Alright. Thanks very much. A star-studded lineup as you can see to my right here. I won’t bother introducing them. I’m sure you know who everybody is by now. Now, normally, being a “W”, this whole thing would go in alphabetical order. I was going to give you first crack, Felix, because you’ve probably spent a lot of time being the last guy called on alphabetically, but I think I want to start with a general view of Europe, and then I’m going to get down into some of the countries, so let’s go to George at the end. George, can you give us an overview. The European project, where do you see it in macro terms right now?

GEORGE: Well, when you look at Europe in 2008, 2007, and you look at Europe today, it is a wholly different dynamic. Brussels is in tense relationships, obviously, with Britain, with Poland, with Hungary, with Italy, with Switzerland as we were talking about it. The center is battling to hold on, and the periphery is basically wanting more room for maneuver. The essential problem of the EU is that it is merely a treaty. Embedded in that treaty is a concept of European identity, which isn’t there. I am Hungarian by birth. If I were in Germany, I don’t see my fellow citizens; I see German and history. NAFTA is an entity that is slightly larger than the EU in terms of GDP and population. And NAFTA doesn’t tell other countries… we don’t tell the Canadians how their courts should run. The Mexicans don’t tell us how we should drive our cars. It’s simply a prudential relationship and it works, and if it doesn’t work, we leave. Europe is now facing the fact that it has tried to bring together peoples who have warred with each other for generations, for centuries, and it worked beautifully during prosperity, but the first financial crisis… and there are always financial crises… started ripping it apart, and the Brussels bureaucracy has the subtlety of a hammer. Rather than trying to manage the situation in a win-win situation, it is trying to convince anybody of the catastrophe of redefining the relationship, and now this is the problem. It is, at the moment, a somewhat stable position; it hasn’t improved. But the underlying issue really is, what is not the economic benefit for belonging to the EU? There are some. But what is a political one… because a nation is a political entity, and there are good reasons for political interests, and the EU doesn’t want to recognize the vast diversity of what’s there.

To continue reading, you can find the balance of the panel discussion here.

Trade Signals – Extreme Pessimism Suggest S/T Rally, Equity Trend Signals Weaker Yet Bullish

June 5, 2019

S&P 500 Index — 2,803

Notable this week:

“We are closely monitoring the implications of these developments for the
U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.”
– Federal Reserve Chairman Jerome Powell (June 4, 2019)

Investor sentiment readers were signaling “extreme pessimism.” Powell’s comments yesterday provided relief and sent the markets higher. Shades of “whatever it takes?” The 200-day moving average trend lines continue to rise on both the S&P 500 Index and the NASDAQ Composite Index, signaling a bullish environment for equities. Notable too is S&P 500’s 50-day MA trend line remains above the 200-day MA trend line (“The Golden Rule”). All of the market gains since 1929 and since 1999 have come when the 50-day is above the 200-day. The Ned Davis Research CMG U.S. Large Cap Long/Flat signal remains in a buy signal.

High Yield had a good day yesterday and is nearing a buy signal. The Zweig Bond Model remains bullish on high-grade, longer-duration U.S. bonds. Gold has had a strong week and both the short-term and long-term trends are in buy signals.

You’ll find the latest recession watch charts below. Notable is the Economy and the Yield Curve chart. It inverted in May. Risk of recession within the next six months is rising.

Click here for this week’s Trade Signals.

Important note: Not a recommendation for you to buy or sell any security.  For information purposes only.  Please talk with your advisor about needs, goals, time horizon and risk tolerances. 

Personal Note – Women’s World Cup Soccer

“As I dig deeper, I realize that much of coaching common practices have
very little to do with the way children actually learn. The status quo is deeply rooted and rarely questioned.” – Todd Beane (@_ToddBeane), Founder, TOVO Institute

I hope you’re ok with me sharing a personal story. I really do enjoy writing OMR each week though some weeks more than others. I wake early and write sitting in my favorite chair. Susan makes us coffee. After a few sips, the fog begins to lift, and I get started. This morning, I got up to re-heat my coffee and when I sat down took a break to talk with Susan. She’s a soccer coach and she also teaches a licensing course for U.S. Soccer. She said something to me that I found quite profound.

To set the stage, U.S. Soccer is trying to reshape its thinking. We are just not competitive enough on the world stage. Susan teaches what is known as the “D” level license and also teaches a “Grass Roots” program to new coaches. By age 13, nearly 70% of players are leaving the game and research is telling U.S. Soccer that it is because it is not fun. The game is not player-centered. It is coach-centered. Susan said, “Players are not getting to make their own decisions and, as coaches, we are taking something away from the player and we need to give the game back to them.” One of the major themes in the U.S. Soccer Grass Roots program is something called “Play, practice, play.” In short, less barking and boring drills from the coaches and more small-sided games for the kids. In Brazil, it’s small-sided kid pick-up games in the streets. Some of the best talent is coming out of South Africa, which has some of the least organized soccer in the world.

So Susan is in her chair, with her coffee, writing 22 coaching assessments. One for each participant in her recent Grass Roots class. She rolled her eyes in frustration as one after another commented on how the kids they coach are not technical enough (think ability to move and control the ball), so they have to spend more time doing drills. At the beginning of the class, Susan explained the thinking behind U.S. Soccer’s approach to youth development, why play is so important and how through that play the ball skills come. Yet after the class, one 20-something knucklehead after another disagrees. “My kids are just not technical enough, so we need to do more drills.” Ugh! Had they not listened? Where is their research? It’s a fight to question the status quo. They were taught a certain way. They don’t know what they don’t know. Minds closed. Susan said with frustration, “How can’t these people be opened minded?” I can’t wait to read her assessments. Hope there is bite!

In some way, Felix Zulauf is suggesting we open our minds. He concluded by saying we went through a period where passive investment management was the best way to invest. We are going into a period that will have big up moves and down moves and by the end of the next 10 years we are going to get the dividend yield. That’s about 2% before inflation. To do better than that you’ll need to be a good trader, or you need to allocate to good traders. Active management is coming back. I think Felix is right.

Speaking of soccer, the Women’s World Cup begins next week. Susan is joining a contingent from the Washington, D.C. area to attend a few of the U.S. games in France. The U.S. team is looking really strong and, yes, is dominant on the world stage. Yes, women far superior to men. This U.S. team is skilled, fast, aggressive, and frankly they play a really exciting form of soccer. I’ll be glued to the television. The favorites are U.S., France, Japan, Germany, Sweden, Australia, China, Korea and England. The women’s game has caught fire across the globe.

Best to you and your family. Have a great weekend! Go U.S.A.!

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Best regards,

Stephen B. Blumenthal

Executive Chairman & CIO

CMG Capital Management Group, Inc.

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