Guggenheim's investment chief has a sobering message for investors from Davos: 'know when to get out'

Thomson Reuters

• Scott Minerd, CIO of Guggenheim Partners, says he's starting to see Davos as a contra-indicator - and the euphoria at the conference concerns him.
• "The euphoria at Davos may be a sign that the market melt up may soon begin to cool," he writes in a letter from the conference.
• Minerd cites a number of earlier forecasts on markets and the economy from prior Davos conferences that proved to be way off the mark.

The mood is cheerful in Davos, Switzerland as world leaders and the wealthy elite gather there for their annual pow-wow against a backdrop of solid economic growth and record-setting stock markets.

One investor in attendance finds the situation unnerving.

"The euphoria at Davos may be a sign that the market melt up may soon begin to cool," warns Scott Minerd, chief investment officer at Guggenheim Partners, in a letter from the conference.

His reasoning is fairly simple - the wisdom of the crowd tends to show peak enthusiasm when market bubbles are just about to pop. In addition, Minerd says, his previous experience at Davos two years ago showed him that many of the investment ideas that dominated the conference turned out to be dramatically off.

At that time, "a growing consensus saw the global economy at the brink of recession ... [as] the spread between credit securities such as bank loans and high-yield bonds had dramatically increased relative to lower-risk assets like US Treasury securities."

Instead, the world was on the brink of another bull market run that has seen the US stock market set new records on sometimes a daily basis.

This year, attendees appear to feel quite differently. "As things kick off here in Davos, the sentiment could not be more radically different from January 2016. Global growth is accelerating and risk assets are soaring. Sentiment is so positive, it feels like the discussion will focus on 'How high is up?'" Minerd writes.

He cites newly-introduced US tariffs on solar panels and washing machines, as well as the rising global tide of nationalism that includes crackdowns on immigration, as reasons to doubt the rosy outlook.

"I am starting to consider that Davos may be a valuable contra-indicator," he said. "While I am hesitant to jump to a conclusion, I am troubled by the euphoria undergirding the gathering here. I have seen bull market tsunamis before. They can be both rewarding and destructive. The key is to know when to get out."

Minerd notes that a few years back the big story at Davos was about the emergence of Africa as a key component to global economic growth, a forecast that has yet to materialize.

"While I think that view is ultimately correct, the immediate experience proved very disappointing for investors. Rather than a buying opportunity, investors would have done better to go short for the near term."

Minerd stops just short of implying that investors should be doing the same now with regards to US and global stocks, as well as other high-yielding assets. But he's sure dropping some major bearish hints.