Recently, I had the opportunity to spend some time with leading fund managers and economists at a variety of investment firms. I thought it might be helpful to share with you some of their thoughts – in bullet point fashion – regarding the economy, the markets, Greece/Europe, China, and more. At the end, I’ll try to summarize their thinking and how it may relate to the management of your portfolio.
We’ll start with the overall economy….
- We seem to be nearing the end of fears of a double dip recession in the U.S. This is partially due to the fact that unemployment is not getting any worse than it already is.
- Housing formation issues are creating problems for the housing market. Meaning, the formation of families is slowing and taking longer so the demand for housing is down. Once this improves, and it will, we could see a strong rally in housing – just not sure when.
- The U.S. has faced fiscal issues like this before (namely during the WWII era) but the difference is the rapid growth in taxpayers after WWII that isn’t happening now and won’t happen now.
- We (the U.S.) are a long ways from a debt crisis and we will likely avert the worst case scenario by working our way out of it.
- Current tax transfer payments are at 23% of income and will rise if payroll tax cut is allowed to expire. It will need to expire at some point, just not now.
- Don’t expect a flat tax any time soon due to its regressive nature.
- Consumer spending is up this year in what is a good news/bad news scenario. Personal income is up less than new consumer credit and the savings rate has started to decline. This scenario can’t last.
- U.S. debt issues began in the 1990’s when China devalued the Yuan vs. the dollar. Therefore, we couldn’t (can’t) sell as much as we produced and foreign governments began to increase their dollar (treasury) holdings. This meant our interest rates would trend lower as foreign demand increased and lead to our reliance on debt financing. Unfortunately, this has had the effect of keeping the cycle going and growing.
- Private credit creation needs demand to push it forward. There are some indications that that is happening but likely will be a slow process.
- U.S. debt issues and what the super committee may come up with. There is some skepticism over what might come out of the committee.
Now let’s look at the markets….
- Fundamentals do matter and equity prices follow earnings. The good news is that we have seen earnings increase dramatically over the past decade but P/E ratios have trended lower. This could provide some basis for an upward movement in the equity markets.
- We are stuck in a trading range and have been for some time.
- Fears over a bond bubble have lessened partly due to lower inflation expectations in the future.
- Investors should focus on yield vs. growth in total return for equities.
- Strong correlations across sectors and low dispersion rates have added to market volatility as all sectors rise or fall together. This will likely ease somewhat and allow for diversification benefits even within equity sectors to increase.
- Funds or portfolios that have done the best have included non-traditional assets like commodities.
What about Greece and Europe….
- U.S. exports to Europe are not that significant so a slowing or recessionary Europe is not that significant to our industrial sector.
- Risk to U.S. economy is due to linkages with European counterparts, especially in financial sector.
- Europe is heading into a recession if they are not already there. Unemployment numbers are generally much higher than in the U.S.
- Greek debt is of primary concern, not because of size of debt, but because it may be symptomatic of fiscal issues facing other countries. In fact, total Greek debt could be bought up by the rest of Europe but they don’t want to.
- European Union had been trying to buy some time in dealing with the Greek debt so that other members could work towards getting their fiscal issues in better shape. The potential resolution announced at the end of October was expected to buy some of that time. However, recent issues being raised by the Greek government are putting that settlement in doubt and may cause further market turmoil.
- Ruling party wants to stay in power and will do whatever it takes to keep their economy moving forward.
- There are really two (at least) China’s from an economic standpoint….the official government line which includes much of the coastal urban areas and the then the inland portion of China which basically operates independently. The shadow economy also includes many large enterprises that are not officially recognized by the government but are some of the fastest growing and best run entities.
- A housing bubble has been building for some time in the urban centers. Many of the new high rises are empty and being used as investment properties for those with the means to invest. Current demand is not sufficient to fill what is there now and likely not what is coming.
- China is facing an aging population due to its one child policies.
- Wal-Mart is China’s 8th largest trading partner; the first seven are all countries.
- Many of the ruling party’s families are directing their heirs to leave China – trouble brewing?
After spending time at these meetings and trying to glean what I could from them, it is interesting that almost all of them agree on the issues but there are varying methods to dealing with them. The atmosphere was generally more positive this year as compared to the last year or two and there seems to be a strong focus on U.S. corporate earnings (which have been strong) and the fact that the equity markets are somewhat undervalued. Overriding everything, though, is the Greek issue and the health of China and the U.S. and their ability to grow at a strong enough pace to keep the world from sinking into a global recession. The overall consensus for U.S. equities are that we are in a trading range but could break out to the upside if the Greek issue is, at least partially, resolved.
What do you think? Are the “experts” right?