By Michael Ashley Schulman, CFA,

Managing Director, Senior Portfolio Manager at Hollencrest Capital Management,

Note: A variant of this paper was first published in Chapman University, Argyros School of Business and Economics, The Investment Review, Volume 2, May 2015; click here to download a PDF.

A lot happens and changes in the investment world every day, and market reactions are often contrary to initial expectations; but with an understanding of certain long-term themes one can grasp the big picture of what influences the markets. In the 1980’s and 90s, the average person received much of their investment news from a daily paper and a half hour on Friday evening watching Louis Rukeyser’s Wall Street Week. Today, one is deluged with an avalanche of data, opinions and arguments from professional managers, blogs, investment sites, CNBC, Fox Business, email, retail trading programs, and social media; the doomsayers, rumor mills, and fear mongers unfortunately garner much of the attention. Below are some of the themes that my partners, Greg, Rob, Peter, and I use to protect and grow assets as well as rationally frame and interpret the broad forces moving the market now and over the next few years.

  1. Energy is the new labor; watch on-shoring boom in America: Energy is replacing labor as the cost driver for where manufacturing is located; this presents a profound change to global manufacturing. Now that China’s average pay is half or more of American pay, production is moving to the U.S. (and Mexico) because of cheap natural gas & energy. In addition, numerous technological advances mean that significantly fewer people are used in manufacturing, further diminishing labor costs as a top priority.
    • The US benefits from lower energy costs on many fronts; more consumer discretionary income, a return of manufacturing and heavy industry, a large, stable, domestic energy base, a skilled workforce, and high use of technology
  2. Chinese investment is poised to flood the world: The Chinese, known for their manufacturing prowess and their massive purchases of Western consumer goods, have embarked on an enormous investment buying spree across Africa, Latin America, Europe, the US, and Australia. A looser capital control regime in China will allow the huge wealth created by their decade-long boom to flow into global assets. Such a massive outflow will have the added benefit of helping the Chinese Yuan depreciate so that Chinese exports remain price competitive.
    • This deluge of Chinese wealth is positive for global prices of real estate, equity and debt
  3. Declining commodity prices might be the largest quantitative easing (QE) yet and is just beginning: Regular central bank QE failed to directly put money into peoples’ pockets. Most of the government largesse was absorbed by banks without filtering through to individual creditors. On the other hand, the global decline in commodities markets, which has seen prices drop in food, metal, and energy, will have a hugely positive effect on nearly all consumers, no matter their geography or economic power. Lower commodity costs put real money back in consumer pockets and frees up disposable income. So this drop in prices might be the most effective stimulus yet.
    • This could boost GDP by 0.5% to 1.2% globally
    • Lower fuel costs can provide an annualized windfall of $225B direct to US consumers
  4. Don’t lean too much on old models: History offers little guidance for the months and years ahead. The Fed has never wrapped up a $4 trillion stimulus program and has no experience raising rates from zero. And neither does anyone else. In addition, most economic models don’t properly account for the negative yields we have in European government bonds.
    • Pundits may speak of reversion to the mean and show historical charts with repetitive patterns, but global capital markets have experienced a real shift
  5. Atlas shrugged; low yields are a long-term norm, not a short-term aberration. Many Americans have abandoned their habit of buying stuff they don’t need, with money they don’t have, to impress people they don’t like. America, the Atlas of global demand, has shrugged. As US households reduce debt, the economies of the world need to prop themselves up, but unable to generate enough domestic demand, commodity prices fall, inflation collapses and countries engage in currency weakening battles to gain as much access to the U.S. as possibleThe current weak and deflationary global recovery is the result of policymakers in many countries simultaneously trying to recreate the late twentieth century model of global growth, and failing. Instead of excess supply being cleared through ever higher US household debt, it is now being cleared through lower prices.
    • The current weak and deflationary global recovery is the result of policymakers in many countries simultaneously trying to recreate the late twentieth century model of global growth, and failing. Instead of excess supply being cleared through ever higher US household debt, it is now being cleared through lower prices.
  1. Post-traumatic stress disorder (PTSD) remains strong following the ‘08/’09 crisis: The great financial crisis that occurred six years ago is as fresh in investors’ minds as if it were six days ago and any down move in the market of three percent (-3%) or worse triggers an urge to flight. Understanding this behavior can help one rationalize and cope with market volatility.
    • Down moves of -200 points on the Dow Jones Industrials Index accentuate this feeling because although the number seems impressive, most people are bad at math; a -200 point move when the Dow was at 6,500 (down -3%) is very different than when the Dow is at 18,000 (down -1.1%)
  2. Markets perform better when things go from terrible to bad than from good to great: This is one of the hardest parts about investing. It rarely feels right to invest or rebalance into a cheaper investment class because usually things are cheap for a reason. You’ll never find a market on sale because things are great. Sentiment, trends, investor allocations, and economic and market perceptions play a huge role in market performance. Often, these factors outweigh the fundamentals.
    • If markets traded exclusively on fundamentals it would be a lot easier; but they don’t
    • Discomforting volatility is expected in a rising market
  3. “What’s in your wallet?” You may remember this as the tag line of the old Capital One credit card commercials. But a similar question is going through the minds of professional global bond managers; what is in my fund? When a quarter of the Eurozone government yield curve is negative and German Bund yields are below Japanese levels, low U.S. Treasury yields suddenly don’t seem so low. Thus, on a relative basis, as shown in Table 1, U.S. Treasuries have good reason to look attractive to global investment managers and U.S. yields have a reasonable rationale to stay low.
    • If you were a global bond manager, what would you want in your fund (or wallet); Slovakia at 0.42% or US Treasuries at 1.95%?


Table 1 provides examples of global 10-year government bond yields as of April 10, 2015 to compare to the U.S. 10-year Treasury yield at 1.95%

Table 1 provides examples of global 10-year government bond yields as of April 10, 2015 to compare to the U.S. 10-year Treasury yield at 1.95%


  1. US government reforms and fiscal spending have a good chance of passing in 2015/16. Fiscal sequestration hampered growth; any spending program that opens the purse strings will accelerate growth. Public expenditure is always less efficient than private sector investment, but when the private sector is saving too much, public spending becomes imperative
    • Reform legislation or fiscal spending would be positive for U.S. growth and push equity multiples higher
  2. The trend is your friend – bond yields have been on a 30-year trend down: There is an obvious flaw with the assumption that zero interest rates cause inflation, otherwise, all of the tin-foil hat wearing doomsayers would have been correct about the US having Weimar/Zimbabwe-like hyperinflation. Zero or negative interest rates encourage investment speculation; the largest beneficiaries are rising asset prices (bonds, equities, real estate, private equity) and large companies with capital market access. Those companies aren’t the ones that add the most jobs but the ones that are able to leverage their low cost borrowing to produce more products and thereby keep inflation low.
    • Contrary to many initial expectations, when the Fed begins to raise short-term rates, long maturity bonds could strengthen (go up in price and down in yield) since inflation is the enemy of bonds and the Fed raising rates may douse any hint of inflation
    • When U.S. interest rates do gain upside traction, this – rather than snuffing U.S. stock markets – could spur a reallocation from bonds into equities
  3. New precedents can be made; lucky number 7: The S&P 500 has never posted seven consecutive years of earnings growth.
    • Just because something has never happened before doesn’t mean that it can’t; this is just as true on the way up as on the way down
  4. 18- to 34-year-olds describe their generation as globally connected: 2 billion Gen Ys have grown up in an open source society with direct access to global peers. Advanced technology, diversified travel options, and global cuisines have forged deep connections between cultures. Ys support brands whose ideals and values align with their own and Ys often feel more in common with youth in other cities around the world than with native rural peers.
    • Brands that acknowledge this generation’s global mindset will resonate most
    • Politically and economically, the world is one marketplace – the Westphalian black box, in which what happened within a state’s borders was no one else’s business, is gone – borders are permeable to people, crime, data, videos, weapons, pollution, and pandemics

We hope that you too can use some of these themes to frame the big picture of what moves interest rates, stocks, bonds, real estate, and the value of businesses. Please let us know what questions you have.

.     .     .

[Disclaimer: This information is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the information is prohibited. Persons in respect of whom such prohibitions apply must not access this document. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy and does not constitute any investment recommendation. This is meant to be a discussion piece and should not be treated as advice nor as an investment guide. The opinions expressed are as of April 10, 2015, and may change as conditions vary. Any references depend on the circumstances of the individual and may be subject to change. In preparing the information, we have not taken into account your objectives, financial situation or needs. Information contained herein is subject to change. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. All examples, tables and models are used for illustrative purposes only. Please check all info