A letter from Herman Rij – Chairman, Quadrant Private Wealth
Reflections of and on Experience
Most of our clients are familiar with my occasional written musings or communications that periodically supplement my annual letter published routinely in the first quarter. These additional letters tend to arise due to “events of significance”: usually market collapses, sometimes worldly events of potential consequence, or certainly whenever we endure a global pandemic. Sometimes there are catalysts that may not be so scary, but still compel us to comment on them or share them with you.
I did not wake up on Wednesday expecting that the last thing I’d be doing before going to sleep was putting my final touches on this letter at 11:13pm. My wife Claire and I are dog people, and we have a loving Golden Retriever, our longest-lived one of many, that we had needed to take for surgery, again, the day before. We refer to Swedie (her father was Sven, a Swedish import) as our “million dollar dog” because she is an enthusiastic athlete with a propensity for injuries that require repair. She is now 13 ½ years old, and we had nervously wondered whether we would see her again after surgery. (Gratefully and deeply relieved, I picked her up Wednesday afternoon. Good news. She is home and recovering. As are Claire and I.)
I had some commitments on Wednesday morning, so as I set out at 11:30am on my journey to Philadelphia to pick up Swedie from the hospital, I was faced not only with my concerns regarding her forthcoming recovery, but also wondering whether I would make it back home in time in the afternoon. Quadrant’s Advisory Team and Investment Committee had arranged a 4pm meeting with Byron Wien, a name you may recognize, particularly if you follow business networks or market commentary on television or in print. In short, at age eighty-seven and still working seven days a week, Byron is a living legend, one of the most revered personalities in our industry. He is currently Vice Chairman of Private Wealth Solutions at The Blackstone Group, the largest firm globally specializing in alternative investing. Prior to joining Blackstone, he had acted as Chief Investment Strategist at Pequot Capital, and prior to that, was Chief U.S. Investment Strategist at Morgan Stanley for twenty-one years. He is Harvard-educated, and has received countless industry accolades throughout his storied career.
Our colleague at Blackstone had extended us the privilege of an exclusive call with Byron, one of the most exciting opportunities of my not-so-fledgling career. I was afraid that I would not be able to get back in time for the call. I am happy to report that, despite a tedious north-bound ride on the turnpike, Swedie and I were even home early, and I was able to fully participate in the meeting. I have summarized Byron’s perspective for you below, but I would like to preface his comments with some additional color.
Wednesday’s Zoom meeting with Byron was refreshing and rather enlightening. Some of you that have been clients of ours for many years, perhaps decades, realize that, like Swedie, I am getting “long in the tooth”. It is rare that I have the opportunity to exchange thoughts with one whose teeth may be longer.
For those of you who do watch the business channels, you see Byron on TV frequently. He is meticulous in his appearance, always professional in decorum, and what you might expect of a major figure in finance and as a representative of one of the most prominent firms in our industry. In our Zoom, Byron was wearing a baseball cap because he had allowed the same man who trims his landscaping to give his head a trim that didn’t turn out so well. Byron was articulate, gracious, generous with his time, humble, modest, and unassuming. He treated us like peers, and he valued taking our questions as much we valued him answering them.
Thus came the impetus behind the theme of this missive. This is where the “Reflections of and on Experience” come in. There is one person at our firm has in excess of 50 years in industry experience – me. As I mentioned in last year’s annual letter, that metric alone is no longer of high relevance because the cumulative years of experience of the other advisors on our team now beat me by almost a multiple! In addition, I was struck by this notion: of equal importance is the fact that in our first six years, Quadrant has been able to forge and strengthen relationships with deeply experienced people, firms, and intellect like Blackstone, Byron Wien, Goldman Sachs, Launny Steffens, Spring Mountain Capital, Laurence Gottlieb, Fundamental Partners, and The Carlyle Group. We were proud to be a part of Merrill Lynch for 43 ½ years, but in that environment, we could never have been able to access and achieve what we have now for the benefit of you, our clients.
So, thank you for bearing with me. Without any further delay, what follows is my summary of notes from our one-hour dialogue with Byron Wien. These are a blend of his perspectives as a representative of Blackstone, and as an investor himself.
These are really confusing times.
Coronavirus was an unexpected event beyond anyone’s planning. Its severity was initially underestimated in significance.
We may have gone through the shortest recession in history after witnessing the swiftest, shortest collapse of asset price in history.
There are many who believe in a V-shaped economic recovery and that 2021 will be a very strong year. Byron does not see that. Blackstone believes in a square-root-shaped recovery that is represented by a quick uptick but then with meandering recovery as the world adjusts to the debacle of what has transpired. The initial recovery will last until the fall and then begin to taper off as we address the consequences of coronavirus and all that has come with it.
People are essentially “fed up” and getting sloppy about coronavirus, which is not good. Blackstone does not expect a “second wave” of coronavirus, calling it low probability at this stage, but does expect continued bubbling up of hot spots. There are currently thirty-one states with a rising number of cases.
There are currently approximately thirty million people unemployed. Of those, twenty million will get jobs back. Almost ten million will not get their jobs back because the places at which they worked will no longer exist. Although the unemployment rate will fall to 8-10%, the remainder of the employment recovery will be challenging.
Even people who are able to go back to work will mostly be more cautious when going to spend money. Many will continue to avoid crowds in restaurants, bars, concerts, sports. The older segment of our consumer population may wait even longer to go out until there is a vaccine or some kind of pharmaceutical drug.
Life as we knew it may not come back until 2022. A vaccine may exist by year-end 2020. However, testing for validity will take time, maybe eighteen months or more, and then the logistics of getting a reliable vaccine distributed to the general public will take longer. Once the efficacy of the vaccine is established, front line workers will be able to get vaccinated first. There are many moving parts to this dance and parts of it will be sloppy.
On a global basis, the relationship with China is of paramount importance and one that is difficult to replace. They are our most important trading partner. It is unhealthy for the world’s two largest economies to be at odds with one another. It would undoubtedly affect profit margins if we on-shored all manufacturing and production. The Phase I agreement is moving forward, but the relationship between Xi and Trump is deteriorating. There may not be a Phase II.
There is a legitimate concern about the level of debt that is being accumulated at the federal and national levels. Currently, spending on economic stimulus is $7 trillion, probably on its way to $9 trillion. It is too much too soon. The fiscal deficit is looking to be $3-5 trillion this year. In 2000, the annual federal debt service requirement was $350 billion at a higher rate on a lower debt level. Today we have a much higher debt level but the blessing, in this regard, of much lower interest rates. So the annual debt service amount now is $450 billion. If rates rise, and eventually they will, the debt burden to the government will be incredibly significant and will impact not only how the government is run, but how effectively the economy will be able to operate.
We are headed for higher taxes. There is no alternative. If the Democrats take control in November, higher taxes will come sooner rather than later, and the impact to the economy and the markets will be felt sooner than later. This will be seen in corporate earnings and price/earnings multiples.
Although Biden is leading in the polls, do not count Trump out. He has come from behind before, and there are several months until the election.
With regards to having the virus under control, we are not where Byron expected us to be at this point. We “opened too soon.” We were going to respect social distancing, crowd control, etc. But that has not happened universally…we just do not have it under control.
Positive view: we are recovering! Earnings will be disappointing until 2022.
Concerns: speculation in the markets is troubling. Current market levels are unsustainable.
Price of oil will go up; energy stocks have been depressed for too long.
Precious metals: Gold is in a bull market and going higher because of worldwide concerns – conflict with China, expansion of balance sheet, economic recovery, state of Europe, general uncertainty that abounds. Owns gold personally and will be increasing his shares.
Negative intertest rates do not makes sense. Result of too much apprehension, too much liquidity.
Blackstone is sitting on $150 billion in cash waiting for opportunities. The desirable environment for private equity, private credit and other alternative investments is uncompromised; the key is choosing the right partner.
There will probably be a pullback in the public markets, perhaps 10%, although 15% would not surprise Byron. He does not see a revisiting of the recent bear market, but feels that the market momentum is headed towards “taking a rest”. (I’d like to add a quote from Yogi Berra here: “the problem with the future is you don’t know what is going to happen”.)
In closing, I apologize for the length of this missive. I was so inspired by our conversation with Byron, as was every member of our Advisory Team and Investment Committee, that I wanted to share his “pearls of wisdom” with you. We try not to overburden you with our communications, but it is not often we get an opportunity such as this.
When done, Byron volunteered to make himself available to us again. We definitely intend to take him up on his offer.
As always, please feel welcome to give any of us a call. Just as Byron is not too experienced to learn from our questions, we are not too experienced to learn from yours.