Every so often, an event organized by a big financial services conglomerate primarily to promote a product it has developed can provide some interesting food for thought – and the UBS-sponsored debate yesterday evening over whether we’re heading into a “risk on” or “risk off” environment was one example.
The two men facing off, Mark Fisher and Dennis Gartman, recently put their heads together with some folks at UBS to come up with a “risk on” and a “risk off” index on which the bank and its team of financial advisors could structure and sell exchange-traded notes. Think the market’s mood is going to turn again? Well, you can dump your “risk off” notes (the index is made up of long positions in Treasury bond futures, the German bund and the Japanese yen, and short positions in crude oil, an S&P 500 ETF and a Russian stock market ETF to name only a few) and move into their “risk on” counterparts (you’d end up with long positions in everything from corn futures and a Brazilian Real fund to a variety of US stock ETFs).
Moderated UBS’s chief investment strategist, Michael Ryan, the duo had a captive audience of in-house advisors and a handful of journalists as they debated some of the hot button issues of the day. Ultimately, little separates Mark Fisher and Dennis Gartman: Fisher, a veteran futures trader, began building a big commodities trading firm more than 30 years ago, while Gartman moved from being an economist for the cotton industry to trading in interest rate products in the Chicago trading pits, and then on to run a futures brokerage. (In his spare time, he teaches classes about derivatives at the Federal Reserve’s School for Bank Examiners.) In a nutshell, here are the some of their points.
If you could only pick one, which asset class would you invest in today?
A majority of the audience opted for equities, but Gartman and Fisher both picked commodities. “There already is a bear market in cash and it’s coming in bonds,” Fisher said. In contrast, where’s the risk in owning commodities? Corn is in “uncharted territory.” Gartman agreed. “The demand for stuff is very large and it’s going to continue,” and China will continue to contribute to that, he argued.
Will the Eurozone crisis be resolved without at least one country dropping out of the common currency?
Nope, the two traders say. They only differ on who bolts to the exit first. Gartman is putting his money on Greece, Spain and Italy. (Or possibly Italy, Spain and Greece.) “The whole concept has been utter, complete and total nonsense,” he said of monetary union; indeed, the whole idea of the European Union is politically motivated, and was aimed at controlling Germany in the wake of World War II. Fisher’s view? As we discussed in this column a few weeks ago, he sees the prospect of Germany’s exit as more likely – an exit “from the top.”
Will China’s GDP growth rise, fall or stay at about current levels?
The audience felt that it wouldn’t change much; Fisher argues it’s irrelevant because growth will still be so high in absolute terms. The China discussion quickly devolved into a debate over economic data. “The only numbers I look at are revisions, and more precisely, the direction of revisions,” Gartman said.
Will crude oil prices be higher, lower, or about the same by the end of 2012?
Neither trader worried too much about the prospect of a Middle East crisis unsettling global energy markets, but they did differ in their outlook for the commodity price. Gartman pointed to the rate at which energy companies are discovering and extracting oil in North America, and argued this will limit any price increases. Fisher, for his part, believes crude could range between $80 and $120, a significantly more bullish perspective. It’s the higher costs of extracting those new oil reserves, combined with the regulatory expenses, he says, that lead him to that forecast.
The bottom line: risk on, or risk off?
Although one of the UBS bankers in attendance commented that investor interest in the “risk off” exchange-traded notes has greatly outstripped that in the risk-on equivalent, both Fisher and Gartman are defiant in their preference for “risk on.”
“Everyone is paralyzed,” Fisher acknowledges. But the risks, while grave, are also visible: There’s the fiscal cliff, the question of how to finance entitlements, and the omnipresent question of what may happen in Europe. “When everyone is paralyzed, that’s the time to be long risk,” he insists.