22 Feb WindRock Roundtable: What’s Next in 2018?
In December we participated in a roundtable discussion with Rick Rule, John Mauldin and Chris Casey that was hosted by Brett Rentmeester of WindRock Wealth Management. With WindRock’s permission we are sharing the conversation in its entirety. The topics covered included the dollar, emerging markets, Treasury supply, North Korea and cryptocurrencies. We think many of the comments are as relevant today as they were several weeks ago.
We don’t know what is next, but we do know investors tend to extrapolate the recent past too much and so discussions with people that may not have consensus views are valuable.
What’s Next in 2018?
The financial markets have experienced pronounced volatility in 2018 – especially compared to the historic complacency of 2017. Many investors are now asking: what’s next in 2018? Most economic and financial roundtables include Wall Street economists or mainstream financial commentators. As an alternative, WindRock has assembled a panel of independent finance professionals with unique viewpoints.
The following experts recently joined Chris Casey, Managing Director with WindRock Wealth Management, for thoughts on the direction of the world’s financial markets and economies in 2018:
- John Mauldin, Chairman of Mauldin Economics
- Rick Rule, President of Sprott US Holdings, Inc
- Aaron Dirlam, Chief Investment Officer of SpringTide Partners
- Paul Courtney, Director of Research of SpringTide Partners
WINDROCK: Central banks worldwide appear to be reducing their monetary expansion from the last decade. The U.S. is actually liquidating its bond holdings while Japan and Europe have tapered their expansionist policies. Can the U.S. really disgorge its Treasury and MBS holdings? Is it reasonable to expect the Fed will move forward with its announced plans?
RULE: I don’t think that they have the ability to unwind as much as they have suggested that they’re going to unwind, but the strength in the bond market, continued low interest rates, and the continued strength of the U.S. dollar relative to other currencies will give them the ability to unwind more than I ever would have believed possible two years ago.
MAULDIN: They could, but the question is whether it’s wise. And my answer is: you should have been doing it four years ago. It’s a little late in the cycle to start leaning into non-existent inflation. The PCE [Personal Consumption Expenditures index] – which is what they look at – is around 1.7%. I don’t see anything wrong with letting the economy run a little hot. Maybe with 2.5% inflation you start leaning into it a little bit. But even if you raise rates, you don’t have to begin to reduce your balance sheet at the same time. They truly have no idea what’s going to happen when they reduce their balance sheet. And to try to do two things at once just seems to me to heighten risk. I think a potential monetary policy error is the biggest risk to what is otherwise a pretty good economy. They think they could pull $450 billion out of the market next year and that is not going to have any effect? Well, maybe it won’t, but they don’t know. This is an experiment. It’s no longer quantitative easing, it’s quantitative experimenting.
DIRLAM: We do think they’ll be able to move forward with their plans – for a period of time. We do have some concerns in the first quarter of this year with regards to Treasury issuance. It is estimated the Treasury will, on a net basis, issue over $500 billion in bonds which is more than the first nine months of 2017. So, we have some concerns now that the Fed is a marginal seller and not a marginal buyer. We really have a tough time seeing the Fed being able to sell $50 billion in bonds in late 2018 without any meaningful market dislocations.
CASEY: If they move forward with this, I think interest rates must continue to increase. I think they already have increased to a degree because of this. The plan is to become a seller of bonds while the Treasury issues more debt due to higher deficits? So, I think they can get away with it for a while, but they’ll have to reverse course as soon as rates get out of their control, a recession develops, or the stock market takes a significant hit. Of greater importance than whether they can do this, is why are they doing this? It doesn’t fit with their Keynesian paradigm. Some suggest they’re doing it so they can lower rates and buy more bonds when the next recession hits. But that makes no sense. They must understand their actions can bring about the very thing to which they are attempting to be prepared? I think their motivation is as perplexing as their plans are problematic.
WINDROCK: Trump has a unique opportunity to change the makeup of the Board of Governors at the Federal Reserve. Do you see the Fed acting differently during 2018 due to new appointees?
DIRLAM: We think that Fed policy before Yellen left is fairly concrete in terms of how they’re dealing with the balance sheet. They really crystallized the fact that they would only alter the sale of assets if they brought the federal funds rate back to zero. Powell, the new chairperson, hasn’t dissented on any of their
pronouncements last year. Regardless, we really think the constitution of the Board of Governors is maybe less important overall for monetary policy; at least in the near term.
COURTNEY: We should add that Powell is not an economist which is a material change for Fed leadership for the last several decades. In light of that, we think there is a high likelihood that he continues the Yellen playbook.
CASEY: Assuming a new makeup of Fed governors can change policy assumes that – not only are they somehow different than their predecessors – but also that the Fed is independent and not beholden to the Federal government’s fiscal policy. Greenspan himself has stated the latter.
WINDROCK: While tax reform may help economic growth, it will also increase the deficit. What do you think the impact of tax reform will be on debt levels, the financial markets, and the dollar?
MAULDIN: Debt levels are going to build up and eventually will create problems for us. It’s strange the Democrats weren’t sounding off about the deficit under Obama – and he ran it up by almost $10 trillion. That’s more than every other president in history combined. So, really, we’re talking about an extra trillion dollars over the next seven or eight years according to the CBO [Congressional Budget Office]. But, yes, at some point we’re going to have a problem.
RULE: In the very near term, I think the tax reform is going to be helpful, but don’t mistake me for a supporter of all aspects of this tax reform. The idea that you cut taxes without cutting expenses is in the very long term irresponsible. What it does in the short term, however, is increase liquidity. And if I’ve learned anything in the last fifteen years, it’s that people pay more attention to liquidity – that is, the availability of cash, than they do solvency which is their ability to retire their debt. In the very near term, I think that the tax cuts will be felt rather immediately in corporate cash flows which could increase the capital distribution to shareholders; both in terms of dividends and also stock buybacks. This may be good for U.S. equity indices even though they are at levels that are, by historical standards, fairly high.
This increasing liquidity, if combined with sustained strength in the debt and equity markets, may be good for confidence in the U.S. dollar. So, I suspect in the six-to-nine month time frame – but not a three or four-year timeframe – I think you’ll see surprising confidence and buoyancy in U.S. dollar; particularly relative to other types of currencies.
COURTNEY: At current levels, we don’t see the dollar materially over or undervalued. Now, I think the key driver of the dollar going forward will be the difference between expectations of Fed policy and inflation relative to how they are currently set. In the short term, we do think the Fed may be underestimating inflation and therefore the market may be underestimating the interest rate response from the Fed. But longer term, high interest rates should begin to manifest themselves throughout the U.S. economy, and that’s one of the reasons that we may have a recession within the next 12 to 18 months. Because we think the U.S. growth story has been overestimated, it could lead to the dollar declining from here.
WINDROCK: How impactful do you believe any dollar repatriation will be due to tax reform?
DIRLAM: We’re most interested in what corporations do with this. Are they going to buy back even more stock? This goes to the tax holiday as well with overseas cash. There’s about $2 trillion in overseas cash right now. In 2004, when that tax holiday was passed with about a 5% tax rate, I think about a third was repatriated. It appears that most of it went to stock buybacks and dividends. The S&P 500, over the last three years, has generally done about $900 billion in stock buybacks and dividends. If there’s $2 trillion overseas and a third or half of that is brought back, well that could bring about a sugar high. But we’re
very skeptical, based on recent history, that any repatriation will be meaningful for the economy, or capital expenditures, or for hiring additional workers.
CASEY: Aaron [Dirlam] brings up a good point by using the historical example during Bush’s term in office. Why did so few companies bring money back home? Because, to some extent, it does not matter. If Apple has $100 million in Ireland, it’s not $100 million under a mattress. Perhaps they borrowed against it and used those funds to buy Apple stock. Maybe they used it to expand physical operations outside of the U.S. which still serves American consumers. Corporate executives can largely get around these artificial barriers.
WINDROCK: In addition to tax reform, trade policy obviously has a big impact on business profitability. Despite President Trump’s campaign promises and sincere protectionist beliefs, trade policy has remained relatively unchanged. What can change this situation?
RULE: With the caveat that I’m really a credit analyst and not a political analyst, I think that trade policy is extremely complex, but I also view politics as did H.L. Mencken: elections are but advanced auctions on stolen property. I see trade policy as held hostage to that auction in Washington. There we have trade opponents and trade proponents both arguing their case in the context of electoral politics, and neither side has been predominant. The Wall Street corporatist elite, which is an important part of both the Republican and Democratic funding constituencies, is solidly in favor of freer trade. On the other hand, there is a nativist, populist groundswell of support against free trade, and it is obviously that constituency which Trump relies on for votes. This dispute is one of the great unresolved conflicts in Washington and thus the economy, and I just really don’t know how this will play out.
DIRLAM: I think one of the reasons Trump may have tackled the tax bill first was to put corporations in a better state before he went after trade, because some protectionist policies could really be disruptive. Now he may go after trade which I think is a huge wildcard.
CASEY: Gridlock in Washington may be the catalyst for greater protectionist policies. By that, I mean if Trump cannot push through his agenda, he will act as unilaterally as he can. Not only can he act fairly unilaterally as it relates to trade, not only is this truly a core belief for him, but this message also got him elected. So, while he may have delayed pursing this because he was tied up with tax reform or he was trying to secure the cooperation of China in dealing with North Korea, it’s probably just a matter of time before we have some substantial protectionist policies in place. And while they of course may help some industries and some people, it is always and everywhere at the expense of the economy as a whole. The law of comparative advantage means that voluntary trade is always a net benefit to participants.
WINDROCK: Chronic American trade deficits have resulted in foreign governments (e.g., China, Japan, Gulf countries) holding an immense amount of U.S. bonds. Do you see a situation where they seek to liquidate their holdings?
MAULDIN: There’s just so much demand out there right now. I find one of the oddest things in the world is the response of what you think are conservative central banks. For example, the Bank of Switzerland has like $850 billion of stocks and bonds. They own almost 4% of Apple. I mean, the world is upside down.
RULE: I do not. I think that’s a mistake for them in the long term, but I have learned something interesting in speaking to several large foreign customers of Sprott about buying U.S. Treasuries. They say that although they understand the risks, it is still the deepest, most liquid, and most transparent major market in the world. One of our clients even went so far as to say: “while we don’t particularly trust that market, we trust it more than we do each other.” That tells me something about a strange nature of support for U.S. Treasuries, so I do see it as being very strong as foreigners continue to buy.
CASEY: I agree with Rick that, in general, they wish to hold their foreign reserves in U.S. Treasuries, but each of the major foreign bondholders has a potential incentive to either curtail their future investments or actually sell. Japan is under financial duress. Saudi Arabia is under financial duress and presumably will be exporting less and less oil to the U.S. – thus they’ll have less dollars to put to work. China may dump bonds in any future trade war. The bottom line is that Treasury purchases by foreigners are one of the few things which have held together the American economy since 2008. Any change to this situation has deleterious effects upon the U.S. economy.
DIRLAM: Based on Fed data, foreign holdings of Treasuries have been pretty stable the last several years between $2.8 trillion and $3.0 trillion. Now, it hasn’t gone up even though the Treasury had been issuing bonds, so there’s already been a waning interest on the part of foreigners. So, although we’ve already started to see this, if they started selling – especially in a context of higher U.S. deficits and the Fed as a marginal seller –I think it could push interest rates significantly higher.
WINDROCK: What do you believe will be the result of higher interest rates or a flattening yield curve?
COURTNEY: The yield curve remains the only economic indicator with a perfect track record of calling every post-World War II recession. The two conditions that we would look for in signaling the next recession would be for the yield curve to invert or something very close to an inversion. This would be a symptom of a slowing economy and yet at the same time also reinforces a slowing credit cycle. The second one would be that chorus of people thinking the yield curve doesn’t matter this time. We’re getting both of them which are classic late cycle signs. We think the U.S. could be in a recession within 12 to 18 months.
DIRLAM: The yield curve really started to flatten significantly in September, and we don’t think it’s a coincidence with the first announcement of the tax bill and also the Fed crystallizing their balance sheet program.
MAULDIN: If the Fed hikes interest rates too far, we may get an inverted yield curve and then it’s not a good day at the office for lots of equity. But you can’t use the yield curve as a signal to automatically jump out of the markets, because you don’t know if that means you should get out within two months, or a month, etc. Typically, you have a two-year window.
CASEY: If you combine stagnant demand from foreign actors with increased Treasury supply due to higher budget deficits along with the Fed selling their bond holdings – the likely outcome is higher interest rates – and I do think that’s the greatest risk to the economy.
WINDROCK: Given historically high values in developed markets, do you believe emerging markets represent an attractive investment at their lower valuation levels?
COURTNEY: We think they do, even with the material gains that emerging markets have experienced over the last 18 months. Every dollar invested in emerging markets still gets you almost twice the amount of free cash flow relative to developed markets. While we don’t think there should be parity between the markets due to the additional risks inherent in emerging markets, we do think that gap needs to and should continue to close. It’s not going to be a straight line, but emerging markets should have a multi-year, strong tailwind due to attractive valuations.
CASEY: I agree with Paul [Courtney]. Despite the appreciation in 2017, they represent the best value out there. But they’re not without risk. China could implode – the monetary expansion and debt creation there has dwarfed most other countries. Commodities, while cheap in relative terms, could take a hit with an economic slowdown. Cyclical industries, which are prevalent in emerging market stock markets – and thus purchased by fund managers – could also get hit with a worldwide recession. And it’s worth remembering that these stocks were hit even worse than the S&P 500 in 2008. So emerging markets are worth consideration, but it must be done carefully to avoid some of these risks.
WINDROCK: All equity markets tend to be somewhat susceptible to geopolitical risk. How do you think the North Korean situation will play out?
MAULDIN: I think the real war right now is going on inside the White House and the Defense Department. And, honestly, I think it can go either way. But, if you start a war, you’re basically saying: “we’re going to kill a 100,000 South Koreans” because Seoul is so close to the border. It’s in range of artillery which knows exactly what to hit, and it’s bunkered or buried. Now, will there be much left of North Korea when it’s all over? No. Will Kim survive? No. This is high stakes poker.
COURTNEY: Until recently, I would have said the situation is bad and getting worse. We do believe there is a non-trivial chance of war with North Korea, but we also don’t think it is a foregone conclusion. Trump’s hyperbolic comments, either at press conferences or tweets, are negotiating tactics and therefore don’t necessarily translate into behavior, but actual military behavior and comments from senior military advisers do suggest the administration is taking a pretty hawkish tone. We think Secretary of Defense James Mattis is key. He seems like he has the President’s ear on an issue that few in the administration appear to have expertise. Currently Mattis isn’t convinced the Kim regime has the ability to directly threaten the U.S. We’re paying attention to this as it’s a really big deal, but as long as Mattis holds this view, we think the conflict stays cold.
WINDROCK: Are you concerned about Saudi Arabia being destabilized? If so, what is your outlook for the price of oil?
CASEY: Political intrigue and turmoil has not been completely foreign to Saudi Arabia. Remember that, in the mid-1970’s, King Faisal was assassinated by his own nephew. But this is different, and I think far more potentially destabilizing. The crown prince, MBS [Mohammad bin Salman], who is the de facto ruler, is making enemies everywhere. He alienated the Wahabi clerics because of his social reforms. He waged a war within the ruling family by arresting numerous princes and effectively shaking them down. His foreign policy I simply cannot understand: the war with Yemen, the ostracism of Qatar, the bizarre, alleged kidnapping of the Lebanese prime minister – it just doesn’t make sense. And to the extent I understand anything he has done, I think his actions are political disasters and, at best, short-sighted. So, while I don’t know where the price of oil is headed, I know it will be higher if there’s a revolution in Saudi Arabia.
RULE: I see a bit of instability in Saudi Arabia, but I believe the change of political leadership in Saudi Arabia to a younger generation will ultimately strengthen Saudi society. The long period of $40 to $50 oil, which has begun to destroy productive capacity, is more relevant to the future oil price than the transition of power in Saudi Arabia. The International Energy Agency suggests that the oil industry has delayed in excess of $2 trillion in sustaining capital investments over the last five or six years. The consequence of that is that a lot of important oil production has gone into what seems to be irreversible decline. As an example, deferral of sustaining capital investments in both Mexico and Venezuela has led to really precipitous production declines in some of the most productive conventional oil fields in the world. When you defer sustaining capital investments, making them up takes a long time and it takes more money. It’s also less certain, because if you defer sustaining capital investments with oil at $80, then making those investments at $50 or $55 per barrel is less likely.
The International Energy Agency suggests that the fully loaded cost to produce oil worldwide – not the cash cost, but the fully loaded cost which includes social rents, etc. is around $60 a barrel. So, on a global
basis for some time, the industry has been producing 100 million barrels a day for $60 and selling it for $45. In other words, the industry is losing a $1.5 billion a day.
I think that oil prices will surprise people to the upside in the next three years. I’m not talking about $100 oil, but rather $60 to $75 a barrel – but that will surprise some people. Again, not so much because of the actions of the Saudis or the Russians – and despite the greatly reported increases in U.S. production – but as a consequence of deferred sustaining capital investments in existing fields.
MAULDIN: I don’t think the impact of U.S. production can be overstated. The cost of drilling a well with fracking has dropped 25% a year for the last three or four years, every year. They now have these things called iron roughnecks that take the number of the people on a rig from twenty to five because it’s basically a robot that puts the pipe in the ground, so you don’t have all these riggers. And with the fracking technology, you now get real-time data from the mudcap as they’re drilling, as opposed to having to wait for three days for that mud to come back up. They also can put on what they call an octopus leg. So, you could end up being two miles down and two miles out. And that two-mile out octopus portion can have six or eight extensions off of it, so that makes that well far more productive. Meanwhile, they’re getting terabytes of information every hour. You just can’t understand how this revolutionizes the whole fracking process. They’re going to get the cost of pulling oil up from the ground into the $20s per barrel. It will actually start changing geopolitics.
WINDROCK: Do you find any commodities attractive at current prices?
MAULDIN: I’m kind of neutral about the commodity complex right now. In most cases, the price is neither too high nor too low. But the energy industry is undergoing tremendous change. The price of solar panels is coming down precipitously every year and the quality and the performance levels are going up. I think, in 15 to 20 years, we won’t be building natural gas power plants anymore.
RULE: I think we’re going to see slightly higher copper prices, although it certainly has moved up quite a bit already. I think that nickel will increase – not merely as a consequence of the demand for its use in batteries, but also because it’s a critical element in many industrial applications. And it is being sold worldwide for less than the total cost of production. Another commodity with ultimately strong upside – but not necessarily soon, is uranium.
I’m also attracted to the whole complex of agricultural minerals: phosphate and potash. I don’t see them going higher immediately, but I do know they are also being sold for less than their cost of production on a global basis. And if anything is certain, it’s that we get more and more people every day, and those people want to eat.
WINDROCK: Cryptocurrencies are by far the most profitable investment for 2017. Do you see them as a legitimate investment with greater gains possible in the future?
COURTNEY: We have long been fascinated by the cryptocurrency space and sympathetic to the underpinnings of why it emerged, what it is, and why there is definitely utility there. But we’re probably getting closer to full value, and the reason we say that is it does look like adoption has moved into the mainstream and investing has taken on a speculative tone. Many are not getting in on bitcoin because of its function as a peer-to-peer payment mechanism, but rather for future gain, and this is sort of the definition of the final price trajectory of an asset class.
RULE: I think that people need to be worried about markets that have been in really ridiculous uptrends. For people who don’t understand technology or who aren’t very proficient traders in charge of their emotions, they should be leery about cryptocurrencies. I’m not one of those who says that the technology
is valueless. What I’m trying to say is that I’m leery about any asset class where the price chart looks like a hockey stick. I’m leery when I notice that people are more afraid not to be in cryptos than they are to be in cryptos. Throughout my life, that has always been a circumstance where I’ve found caution would have been in order.
CASEY: I get the apprehension about investing in cryptocurrencies after the year they have had. No one likes to buy an asset which they could have purchased for a far cheaper price not too long ago. But the technology behind cryptocurrencies is real. The blockchain is revolutionary. The comparisons to the Internet – as it relates to the magnitude of potential – are accurate. Those who understand the potential see this obvious parallel. Just based on overall adoption rates, this may be like investing in Internet stocks in 1994. Or maybe it’s like being in Apple not too long after Steve Jobs moved it from his garage. It could still be that early.
WINDROCK: What areas do you like in 2018?
MAULDIN: I’m still nervous, but one of the things that I like is having quantifiable trading systems. I also like real estate that’s producing reasonable returns. But it’s not easy to find, you have to go shopping. Finding real returns, decent returns, requires a lot of work, a lot of skill, and a lot of poking a lot of tires. But it can be found. These opportunities tend to be smaller: $10, $20, or $30 million opportunities.
CASEY: I agree with John [Mauldin] that certain types of real estate make sense. We’re mainly interested in farmland and specific types of residential rental apartments. Given worldwide valuations and the various catalysts we see negatively impacting these markets, we’re mainly focused on minimizing risk – which is a reason we’ve liked precious metals for some time. But we understand you need to accept some risk to position yourself for substantial returns, so we do like emerging markets, cryptocurrencies, cannabis, and also uranium which offers great value at these levels.
DIRLAM: We have small tactical positions in broad commodity futures and master limited partnerships given current valuation levels. We both like both of those, but we don’t love them yet. For equities, we do like emerging markets due to better relative value and better growth prospects. Even better are frontier markets. Think Southeast Asia, North Africa, Nigeria, etc. In our opinion, frontier markets are the emerging markets of 15 to 20 years ago. In a lot of cases, the debt-to-GDP ratio of these countries are 50% or 60% compared to something north of 100% for much of the developed world. Their economies are still very reliant on commodities, but we are seeing some political changes which seem to be, albeit slowly, positive.
But there’s a lot of things that we don’t love right now. As allocators of capital, we like a contrarian approach that looks at inefficient markets, where capital has not yet found its way, or holding cash to deploy it during dislocations. And we do think there will be dislocations in 2018.
RULE: For investment professionals and professional speculators, for those willing to take real risks, I think the Russian, South African, and Zimbabwean markets will surprise everyone to the upside. I’m still long Russia which people love to hate. Africa, however, is a unique story. I spend a lot of time there. It is such a young continent. It has a much better range of human resources than they’re given credit for. It has so much potential that the governments don’t actually have to do a good job, they just have to do less of a bad job. And some political changes do appear to be afoot in Africa.
For example, I think the possibility exists – not the probability, but the possibility – of political reform of some fashion in South Africa with Cyril Ramaphosa eventually replacing Jacob Zuma in office [subsequent to this discussion, Cyril Ramaphosa was elected President of South Africa]. It could also happen in Zimbabwe. Mnangagwa, the successor to Robert Mugabe, was certainly a Mugabe lieutenant and certainly isn’t innocent of all the sins of the last twenty years. However, the man is reputed – at least in Zimbabwe – to be a pragmatist. As Zimbabwe is a country that’s been thoroughly destroyed, just a little bit of good governance could go a very long way. Especially when you consider the incredible skill set of the Zimbabwe diaspora and the amount of capital that would like to be deployed in that country.
WINDROCK: What areas should investors avoid?
CASEY: So much to choose from. But based on our prior interest rate conversation, I would have to say bonds in general. That goes against the typical traditional advice you may hear from any financial advisor concerned about the stock market and the risk of a recession. But the next downturn may not be your typical situation. Too many people view the stock and bond markets as yin and yang. One goes down, the other goes up. And that has been traditionally true, but if rates go up significantly, it also hurts stocks. Just look at the 1970’s. Higher rates mean less stock buybacks which have artificially propped up this market. It means higher interest expense and lower profits. It means that the present value of discounted cash flows – the ultimate source of all value and the underlying basis of a stock’s price – is reduced substantially. And these are the repercussions without even adding in a recession. The combination of both could be devastating to the stock and bond markets. But, of course, timing is uncertain, but becoming less so the longer this goes on.
RULE: Lithium is on many investors’ radar screens, but it’s something to be concerned about. In the near term, the lithium price goes higher because demand has risen faster than productive capacity, but lithium is not a material where there’s a supply shortage. It’s a material where there’s a processing bottleneck. So as the industry adds more processing capacity, the supply of lithium increases fairly dramatically.
In general, I think this is a period where, as usual, your head has to overwhelm your heart. When any market has performed well, the market’s performance itself seems to justify the narrative around it. Then the market becomes self-fulfilling – until it isn’t.
MAULDIN: You should not be long and passive in almost anything. In response to a potential market downturn, you should not say, “I’m just going to ride it out.” Unless you’re in your 30s. Because most investors don’t have 15 or 20 years to come back. You should have some type of active hedging policy with active management. A buy and hold passive investment style will be extraordinarily dangerous at some point.
Now, will it happen in 2018? Maybe. The market could roll over and there’s all sorts of reasons for it to roll over. This market has rallied in spite of everything and valuations are getting more and more stretched. The thing that worries me most in the U.S. is high-yield; not just in the U.S., but in Europe. High yield is silly in Europe. I mean, when you can get a 10-year U.S. bond paying more than junk bonds in Europe, something is out of whack. I think the most stretched markets in the world today are the junk bond markets.
What people don’t understand is that Dodd-Frank limited the ability of the big banks to make a market in high-yield bonds, so when it starts rolling over, there’s going to be no liquidity. It can get out of control really quickly. And the high-yield ETFs could see those funds drop 30% to 40% in a few weeks.
WINDROCK: Thank you for all of your comments and good luck in 2018.
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