I just returned from the annual Strategic Investment Conference in Carlsbad, California where some of our industry’s brightest minds exchanged thoughts, ideas, data and predictions. Economists, hedge fund managers, analysts and high-net worth investors gather here each year to try to figure out how to best navigate the economic and geo-political waters for the next twelve months (until the next conference). I sat through meetings for 2+ days and came away with the following conclusions.
Although the U.S. economy is showing small signs of positive growth, don’t expect a return to “normal” historical growth rates of GDP for a long time, several years maybe. With economic growth slowing in China, Europe continuing to be a drag for a long time and Japan looming as a potential financial problem, it will be difficult for the U.S. to expect a return to annual growth rates of 4%+ Real GDP. Real returns of between 1% and 2% should be a more realistic expectation.
A high unemployment rate that is stubbornly declining is a problem in the U.S. The more chronic, but related problem, is a decreasing “participation rate.” The participation rate is the number of people who are employed plus those who are actively looking for work (unemployed). If you give up looking for work, you are no longer considered unemployed even though you don’t have a job. That’s right, the unemployment rate can decline without adding any new jobs … if the people who are unemployed just quit looking for work. An interesting phenomenon of this economic crisis is that many persons who were unemployed have managed to qualify for some other sort of government assistance (e.g. disability) so they no longer have to look for work and they are no longer considered unemployed. This is bad for two reasons:
- Our overall workforce is shrinking causing us to be less productive.
- Many of the people who have left the work force are taking assistance from the government, causing a further drag on the economy.
The PIIGS (Portugal, Ireland, Italy, Greece and Spain), a very popular topic one year ago, were hardly discussed at this year’s conference. Oh sure, the PIIGS will continue to exhibit slow growth and experience high unemployment, but they were clearly not on the immediate radar screen of any of the conference speakers.
A very popular topic this year was monetary policy. Specifically, monetary policy by our Federal Reserve Bank (the Fed), the Bank of England (BOE), the Bank of Japan (BOJ), and the European Central Bank (ECB). Faced with slow economies and high unemployment, central banks have been trying to stimulate their respective economies by executing their own versions of Quantitative Easing (QE).
In particular, the BOJ has been executing a massive QE of its own, purchasing Japanese Government Bonds (JGB) to the tune of about 16% of Japan’s Gross Domestic Product (GDP) per year. To put that in perspective, our Fed is purchasing U.S. Government bonds equal to about 6% of U.S. GDP. So if you thought our central bank was printing money irresponsibly…
The net effect of the BOJ printing money in order to purchase JGBs is that the Japanese yen has significantly declined in value relative to other currencies and the interest rate on the JGB has remained very low. In the past six months, the yen has declined 22% vs. the U.S. dollar, which is kind of what the BOJ was hoping would happen. This is a significant positive event for the Japanese exporter who now will see increased demand for Japanese products from consumers all over the world. That Toyota dealer can now offer a much better deal than the Ford or the Hyundai dealer.
Needless to say, exporters from other countries are not crazy about the price advantage now enjoyed by their Japanese competitor. South Korea is a country whose exports compete directly with many Japanese products and the yen has declined 27% against the Korean won. This cannot be making the Korean government very happy. In order to compete, central banks of all developed nations, as well as developing nations, will try to figure out ways to devalue their own currencies. So don’t be surprised when all major central banks keep printing and spending just to keep up with the other central banks that are printing and spending in what could be considered a “race to the bottom.”
Harvard professor Niall Ferguson noted that there has been a breakdown of the contract between generations in the U.S. An example of that is the “contract” that we have with the government to receive Social Security and Medicare benefits-a contract that requires younger generations to pay into a system designed for our retirement. As originally outlined, these entitlements were to be received beginning at age 65 and then throughout the rest of our lives. In the original contract, there was an understanding that the average American was only going to live a few years after he or she began receiving Social Security payments. However, the older generation broke that contract. We quit smoking, joined a gym, started eating better and medical advances now help us live longer. But we still expect younger generations to live up to the contract. We expect to start collecting our entitlement benefits beginning at age 65 and we expect to continue to collect them until we die.
Mr. Ferguson says that in order to achieve intergenerational equity, we would have to undertake massive fiscal reform right now. If that does not occur, then we can someday expect an “era of generational conflict.” I think it is safe to say the odds of generational conflict are more likely than the odds of massive fiscal reform.
Several speakers mentioned Obama’s Affordable Care Act and not one of them referred to the act as being “affordable”. The consensus was that Obamacare will end up being much more expensive than anyone realizes and will ultimately be a drag on U.S. economic growth.
One other speaker noted that we (the planet earth) lack global leadership and listed four reasons:
- There are too many countries that “matter” and it is hard to coordinate leadership efforts.
- The United States does not want to do as much. It is less interested in being a global policeman.
- Our allies are busy (with recessions and other economic crises). They have had four years of an economic crisis and could have four more.
- New countries that matter are different. They are poor with different economic systems and different economic values.
Interestingly enough, he was bullish on the United States. He sees the U.S. as being stable in an unstable environment. There is an energy boom going on in the U.S. due to new technologies related to energy exploration. There may actually come a day when the U.S. is energy independent.
As bad as our government may seem at times, he said it is not so bad. That in emerging markets, bad government stops you from doing business. In the U.S., bad government is an irritation and makes doing business difficult.
Meanwhile, the U.S. stock markets posted their seventh consecutive positive month, posting total gains in excess of 31% since the end of September. They were up another 1% in the first three days of May. At Boyer & Corporon Wealth Management, we stated back in December that this stock market didn’t have any serious obstacles and that we were increasing our allocation to equity (stocks). The election had been decided and the Fiscal Cliff was soon to be a non-event. Going forward, we continue to see a low inflation, low interest rate environment. We are not reducing our equity allocation yet, though we are reminded of the phrase, “Sell in May and go away.” Although the big money has been made, many municipal bonds, particularly those in cities located in California, continue to offer good relative value.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.