US Debt vs. US Innovation
Friday, 6/06/2014 09:49
The smartest economy is also hugely in debt. Which factor wins for investors...?
HOW do you calculate ROI on investment conferences?
asks Karen Roche at The Gold Report.
They often require travel expenses, time away from the office and some eating of rubber chicken with mysterious sauces. But the right conference can result in a whole new way of looking at your portfolio. To evaluate the recent
Altegris/Mauldin Strategic Investment Conference in San Diego, we asked 3 attendees for their insights on the major themes.
Up on the stage, speakers included John Mauldin himself, plus former Speaker of the House of Representatives and host of CNN's Crossfire Newt Gingrich, as well as Gluskin Sheff & Associates chief economist David Rosenberg and Hoisington Investment Management executive vice president Lacy Hunt.
"Our economic future depends on a race between two accelerating curves," said Mauldin – "debt and innovation." Our expert attendees likewise saw much to fear and hope...
The Gold Report: On the debt side, where does the biggest threat exist? China? Europe? Japan? The US? Consumers? What is the highest likely outcome from the accelerating debt curve and how will that impact the US, Europe and Asia?
Santiago Pinson Correa, vice president of asset management, Invercap: China, Europe and Japan all concern me. Japan is the one that concerns me the most as it is the country with the largest variability of possible outcomes. Overall, I believe that the most likely outcome on a global basis is a long period of sluggish global growth.
David Hay, chief investment officer, Evergreen GaveKal: In order of our concerns: China, Japan, Europe, US We see sluggish growth being the most likely near-term outcome, with the possibility of deflation leading to hyperinflation being a longer-term possibility. If so, we see Japan leading the world down that terrifying path.
Nathan Sonnerberg, chief investment officer, Glassman Wealth Services: Japan is the scariest debt situation out there, particularly given its demographic composition and current lack of structural reforms. I believe the US is best positioned to manage its debt load. We have the best demographics of most developed countries, natural resources, a continuous pool of new immigrants and this amazing desire to succeed (the American Dream), not to mention that most innovation happens here in the US We need time for Washington policymakers to dismantle the obstacles for our true growth potential – lower corporate taxes, simplified tax code, etc.
Europe has greater challenges with its debt load. Even with its common currency, the Euro, the countries are each distinct and different from one another (e.g., Northern Europe vs. Southern Europe). Their banks need time to recapitalize to allow the bad debt to run off. Also, the European Central Bank (ECB) has a different stated objective than the US Federal Reserve. As such, it remains to be seen whether ECB President Mario Draghi actually is willing to employ unconventional means of monetary policy and stimulus.
TGR: Depending on where you see the greatest threat and opportunity, how are you adjusting your portfolio to prepare for what is coming?
Santiago Pinson Correa: There are many scenarios that could lead to a spike in systemic risk, hence I believe that the best way to protect a portfolio is to take advantage of the current very low levels of volatility prevalent in many asset classes to build "optionality."
David Hay: We feel that one of the most unappreciated ports in the storm is Canadian corporate debt denominated in its currency. Canada has outperformed all other OECD (Organisation for Economic Co-operaton and Development) countries. It is not printing money, and it is close to moving into a fiscal surplus. Additionally, thanks to a 10% sell-off, the Loonie looks undervalued. We believe it will trade back up to par versus the US Dollar.
Nathan Sonnerberg: One needs to stay diligent in this environment. There are both deflationary risks and inflationary risks. Depending on which takes hold first implies a somewhat different structural approach. We are inclined to believe the greater risk is inflation, something the Fed desperately wants. As such, we want to own productive assets with pricing power and real assets that are scarce or hard to replace – real estate, infrastructure, energy infrastructure MLPs.
TGR: Most of the speakers were not worried about recession in the US in the near term. To what extent do you agree?
Santiago Pinson Correa: I am not too worried about it though my base case is that growth remains sluggish in the US for some time.
David Hay: We usually agree with Mark Twain that if you find yourself on the side of the majority, it is time to reform. However, currently we don't see the preconditions in place for a US recession, which is certainly a consensus view. However, if credit spreads were to blow-out – a distinct possibility – our attitude would quickly change.
Nathan Sonnerberg: I am not too worried about recession. This year, 2014, should be a period of accelerating growth and demand in the US.
TGR: How big of an impact can advances in technology and biotech have on the global economy? To what extent do new technology products need to have impact on the developing world, as well as the developed world, to be transformational?
Santiago Pinson Correa: I believe technical advances can have a very significant impact, both positive and negative. The positives are obvious, however, I believe that they would not necessarily lead to much higher levels of employment due to certain jobs being replaced by robotics and a mismatch in skills between job seekers and requirements from job offerers. Regarding its impact on the developing world, I believe that we could see production of certain products moving away from developing countries and back into the developed world as advances in areas such as robotics could make it affordable to do so.
David Hay: It's obvious that things like smartphones are having a hugely beneficial impact on the global economy and especially the developing world. The "democratization" of information thanks to what used to be a supercomputer now in the hands of a farmer in Rwanda is an enormous revolution. However, I worry that in the Middle East, where there is an anti-modern and anti-West bias, they will fall further and further behind and at some point try to use our own technology to harm us. If they feel that they can never catch up, the radical elements in those countries could seek to bring us back down to their level.
Nathan Sonnerberg: There are immense impacts. Technology and the Internet have allowed us to enter the golden age of globalization and truly global economies. Some positive impacts include better pricing transparency (think Amazon, Pricegrabber, etc.), greater productivity and greater access to knowledge and information. This should result in reduced inflationary pressure on goods and services. Tech and biotech will continue having massive impact on the global economy. I am not looking to directly enter the life sciences sector. I am looking at managers that have expertise to identify leading companies in these areas.
TGR: What sectors will technology impact the most? What about the impact of new methods on old industries like oil and gas or manufacturing?
Santiago Pinson Correa: I believe that the greatest areas of opportunity will be in healthcare/biotech and in robotics and other technologies that will transform the "old industries."
David Hay: Energy is much more my area of specialization and the breakthroughs in this field have been breathtaking. More is still to come thanks to the entrepreneur mentality of the smaller companies that have been at the vanguard of the new techniques. 3-D printing should also have a massive impact on the US manufacturing sector, further leveling the playing field with China. As cheap labor becomes less of an advantage due to automation, cheap energy becomes the swing factor. Advantage America.
Nathan Sonnerberg: The services economy.
TGR: What was the most important thing you took away from the conference and what will you do differently because of what you heard there?
Santiago Pinson Correa: That we live in a world full of both uncertainty – what the end result of the "great experiments" in monetary policy for the world's largest central banks will be – and also great levels of complacency from global investors. Hence I would be looking to buy cheap volatility wherever I can find it.
David Hay: We went into the conference worried about US money velocity and inflation on the verge of accelerating. We thought Lacy Hunt was one of the most persuasive speakers and he definitely sees velocity continue to head lower. Thus, we are more concerned about some kind of deflationary shock that would further lower "risk-free" rates. Also, the parallels with the 1930s, economically and geopolitically, per speakers like Newt Gingrich, Saeculum Research President Neil Howe and Harvard University Professor Niall Ferguson were also striking.
Nathan Sonnerberg: Interest rates are likely to stay lower longer than most people expect. We will stay committed to equities (attractive on an absolute and relative basis to bonds) and to spread fixed income solutions until either rates truly rise and stay higher and/or inflation rears its ugly head.
TGR: Thank you for your insights.
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