Introduction: Thomas D. Conrad, Ph.D. is currently a hedge fund manager and president of Financial Management Corporation. He received his Masters Degree in Accounting, Statistics, and Financial Management from The University of Maryland in 1961 and his Ph.D. in Business Administration from The American University in 1965, with emphasis on Securities Analysis and Managerial Economics. His Doctoral Dissertation, "A Statistical Analysis of The Results of Integrating The Use of Mutual Funds and Life Insurance in Financial Planning" was later published. Dr. Conrad has taught and lectured at seven universities, including The American Institute of Banking and The American Savings and Loan Institute. Dr. Conrad has held a seat on the Philadelphia-Baltimore-Washington Stock Exchange, and served in the Reagan Administration as Deputy Assistant Secretary of the United States Air Force (Financial Management). His website is www.worldfund.net.
Anthony Wile: Hello, Tom. We last spoke to you toward the beginning of this year. How have the markets been treating you?
Tom Conrad: We've done very well. As one of the very first, if not the first, fund-of-funds from a hedge-fund standpoint, we don't directly invest. We use managers. In aggregate, my managers are responsible for nearly US$3 billion so we are dealing with top professionals with the resources to run serious money. Now, I am one of the 15 managers for our fund and I've done about 14 percent this year, so that is very, very good. Our estimate earlier this year was 11 percent so we've exceeded expectations thus far.
Our Chinese managers have done well, though we have our outliers, including someone down 11 percent. That's why you need diversification of managers in terms of style, strategy, region and sectors. Sometimes the smaller managers do best, especially because the smaller managers are more nimble and can move in and out of opportunities without moving the market.
Anthony Wile: You have any other numbers to share with us?
Tom Conrad: Most of it is very good. For the year to date, the S&P is up around 1.04 percent at the time of this interview at the end of November. Our fund is up around 14 percent, according to our calculations. We are highly diversified by sectors and geography and that helps.
Chinese markets had a rough time late in the year. But we made good money in China, especially on the short end. We used four managers in China and one is up around 33 percent and another 21 percent. They were astutely positioned, properly diversified and had the right strategy at the right time. We have a manager in Japan that is up over 10 percent, so Asia has been good to us.
Even today, people don't understand hedging and diversification. I was speaking to a college professor who was going to invest with us. But when I sent him the subscription papers, he told me he was worried about our Chinese exposure. We'd just made a six percent gain in China in a single month, but that didn't make any difference to him. Short or long, it didn't matter. He simply didn't want any Chinese investments. I tried to explain that China was part of our diversification strategy but I'm afraid he didn't understand.
Anthony Wile: The beauty of private hedging is that you can take positions as you wish. You're not bound by regulatory guidelines.
Tom Conrad: I've often observed that the regulatory structure makes markets more fragile because so many managers are regulated in terms of the strategies they use. Everyone is herded in one direction. Mutual funds are not allowed to hedge the way hedge funds are, for instance.
Anthony Wile: How do you see the markets ending this year?
Tom Conrad: Well, I'm perpetually a bear despite our good performance this year and I'm still looking for my 20 percent correction. We've just never had it despite the volatility of these past months. Markets are over-extended and earnings are not justifying current prices. We need a significant correction and we haven't gotten one.
Anthony Wile: You've been looking at alternative investments?
Tom Conrad: Yes, last time I mentioned farmland and expanding our silver holdings. We'd purchased shares in a farm in Eastern Europe and we have farmland in Uruguay as well. Agricultural cropland will continue to be in demand as the world's population increases, There's an increased standard of living in China and maybe in Africa, too. These countries are not going to stop having children.
Going forward, our emphasis will be increasingly on commodities, as I am generally negative on the markets. I am fairly sure markets will close down from where we are this year.
An interest rate hike may send the dollar higher, which wouldn't necessarily be positive for the markets. But there are other factors weighing on securities investments. Shipping is really slow right now. The Baltic Dry Index that measures shipping around the world is at a historic low. That means basically goods are not being made or shipped. This is the twilight of a long bull market. After five-plus years we have to have a major correction but there is no sign of it as of this interview. We remain vigilant.
Anthony Wile: Does that translate into certain positions?
Tom Conrad: We continue to expand our positions in precious metals. We've been buying baskets of rare metals as well. The ones doing the best right now are the baskets used in military production. These metals are used for jet engines and other parts of military aircraft. I buy the baskets through a company in Panama, and they sell them and store them. They offer five rare-metals in a basket categorized by various kinds of manufacturing. I have a number of different baskets and the cheapest basket is US$11,000.
Anthony Wile: I'm not surprised about the military basket. The military-industrial complex certainly isn't in a recession right now.
Tom Conrad: No, not at all.
Anthony Wile: Probably rare metals have done better than precious metals …
Tom Conrad: Yes, the one with Department of Defense exposure. As for gold and silver, I'll hold precious metals regardless. They're important to me, especially at this juncture in the business cycle.
Anthony Wile: When you speak of farmland, you are focusing on agricultural products or some of the newer frontiers like hemp or cannabis?
Tom Conrad: I'm not well-versed in either area but I do know hemp was a significant crop in the US before cannabis was made illegal. We're just rediscovering the uses in the US. Marijuana is something I'm keeping my eye on as well, especially for medicinal purposes. It certainly holds promise generally – considering the size of the alcohol industry – and for health care purposes.
Anthony Wile: Unlike other areas, we're finally seeing some deregulation – actually legalization.
Tom Conrad: It's a bright spot, but I'm afraid it's not a very bright picture generally speaking. The West is moving in the wrong direction. The European Union is becoming more heavy-handed in its regulations and the US continues to make massive changes to the system in such fundamental areas as health care. There's a demographic shift going on as well. Many young people are moving out of the US because of lack of opportunities and a sense the US is in decline. That means more money is flowing offshore as well.
People moved here for freedom from crime and to get away from laws and regulations in the "old country." But now parts of the old country have followed them here. It used to be easy to start a business in the US. But these days small business is getting beat up more than ever. Also, despite low nominal rates banks aren't loaning to community businesses. You need a loan and you're looking at 20 percent interest.
Anthony Wile: It's ironic that near the zero bound businesses are having more trouble than ever with access to capital.
Tom Conrad: The banking system is not the entrepreneur's friend. When times become more difficult, getting a loan does, too. And even when the Fed injects liquidity into the market, that doesn't mean small businesses participate. However, they do ride the wave up and back down again in terms of the boom-bust cycle. And it's happening again, most obviously. Easy money is the goal and has been since 2008. And markets have been responding since 2009.
Anthony Wile: Perhaps businesspeople ought to look abroad if they can.
Tom Conrad: It's difficult at home but they are making it increasingly difficult if you want to expand abroad. For instance, I had Chase close an account on me – without any explanation. And Fidelity closed an account with US$3 million in it. After 55 years, they shut it down. I asked why and they said they didn't have to tell me so they weren't going to. But I am sure it was because of my trading activity abroad. I trade around the world and more and more US regulators are putting pressure on the banks to scrutinize that kind of activity and to make it more difficult.
Anthony Wile: Do you think things will change? Are we on a downward spiral in the US and the West generally?
Tom Conrad: We're in a position where what should be positive is actually going to look to many like a negative. For instance, we are well into the political season now in the US and there are differences between the two parties' platforms. Of course, we know that when politicians get into office things don't change nearly as much as they claim they will. But let's pretend we get a Republican sweep and a "small government" program is enacted.
Think about it. This sort of approach would certainly be detrimental to market averages. Presumably the new administration would start reducing the national debt and there would be layoffs in government, as it is one of the country's largest employers. They will attempt to balance the budget and the resultant pain will be reflected in the larger economy.
Anthony Wile: Of course, the alternative is the Democrats.
Tom Conrad: Hillary may actually win this election and in the short term anyway might be better for the markets, as she is determined to run more deficits, appropriate more military spending and continue with the larger welfare state.
Anthony Wile: That doesn't sound like much of an alternative … It sounds like more of the same.
Tom Conrad: There's Cruz. He has some views I agree with. Cruz wants to do away with the IRS, for instance, but he's a senator and senators don't get elected president. There's also Rand Paul, son of the libertarian congressman Rand Paul. He is leading the charge on the audit-the-Fed bill, but he won't get elected.
Anthony Wile: His views are less extreme than his father's but probably still "out there," when it comes to mainstream voters.
Tom Conrad: Yes, but that's not the real reason. He's too short. You can't get elected under six feet tall. And it's true, Rand Paul carries his father's stigma. Don't get me wrong, Ron Paul is a great man but from the standpoint of mainstream voters, he puts Rand in a position of having to explain a lot about himself to overcome his father's image. Finally, Rand is not especially charismatic.
Anthony Wile: Okay, Tom, let's sum up. You're still expecting a significant downturn and you also expect markets may move down this month, especially equity markets. You're not expecting a major war to break out but you are expecting significant, heightened, military tensions. That's good for the pocketbooks of major corporations but not necessarily for equity.
Tom Conrad: Sooner or later we're going to end up with not just a correction but a recession, and maybe a big recession – a really big one. And increased religious tensions in the US as well. For instance, I read that Obama has just told the military academies that their curriculums have to be approved by the Muslim community. You have to watch this administration closely.
Anthony Wile: That's interesting. Who comes next in your estimation? Who's going to win?
Tom Conrad: I really don't know. I really wish I could say it mattered.
Anthony Wile: I hear you, Tom. Thanks for the insights, as usual.
Tom Conrad: My pleasure.
Tom gives us a lot to think about when it comes to end-of-year investing, and much of it we agree with. He sees hemp and cannabis as growth sectors along with farmland. We tend to agree with him about the markets as well. No matter what happens, markets are in for a rougher ride, or perhaps a more volatile one, in 2016. The easy money bubble is certainly not dis-inflated but it seems to us that central banks are going to have to blow harder and harder to keep it buoyant.
His take on politics and the market is sensible as well. It could be that a Republican administration would collapse markets more thoroughly and quickly than a Democratic one. But more likely, no matter which party ascends, we'll see business as usual. The shadow government will continue to progress. The long war will continue with its attendant tension and increasingly authoritarian expansions.
We certainly would suggest a diversification into physical gold and silver if you are not already there yet. And with gold and silver, though Tom did not mention it directly, we'll probably see an appreciation of gold stocks. Within such an advance we've mentioned that juniors with assets in the ground may appreciate more rapidly than those that have traded gold for fiat dollars. You can see more on that here.
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