I watch Bloomberg television everyday. It is something that plays in the background as I work. The primary reason is because I like to know what is going on with the economy and financial markets, and I like to hear what other professionals and pundits are saying about the markets. It is called infotainment.
After thirteen years in this business, what I have learned is most people do not have any special insight on the direction of economy or financial markets. In fact, many so-called experts are either too bullish or too bearish. However, there is an old adage on Wall Street that ‘If you say the same thing for long enough you will eventually be right.’
When I sit down with clients many of them want me to look into a crystal ball and tell them what I see. What I tell them is few people, if any, can accurately predict the future. If there are any absolutes, it is to ‘Expect the Unexpected’ which is a magnet on my refrigerator (next to my ‘Take a bath in the real estate market with Mr. Hou$ing Bubble’ magnet).
So why make any predictions or forecasts if it is a seemingly futile exercise? When it comes to investing all of the old pros provide the same advice which is -- 1) develop your own ideas, 2) have some convictions, 3) admit when you are wrong.
Below we have developed some of our own ideas that we often discuss with our clients. Please take them with a grain of salt as the following disclaimer warns:
All estimates, opinions and views expressed are our own and constitute our best judgments as of the date of this podcast or email and may be subject to change at any time without notice. These opinions and views are made under conditions of great uncertainty and there is a good possibility that our judgments could be completely wrong. However, we hope for your sake and ours that we are more right than wrong of which there is no guarantee.
The PPWM Outlook Fall 2009
A) The global economy is nearing a trough in the business cycle marked by the early phase of a cyclical bull market in financial markets.
B) Coordinated global fiscal and monetary stimulus provides a positive environment for investors.
C) Global interest rates will remain low for a significant period of time as central bankers work aggressively to stimulate risk taking behavior and economic activity.
D) We are in a long-term bull market for commodities, driven by new demand from emerging markets.
E) The developed economies will grow slower than emerging economies.
F) Companies in the developed world that can sell products into the developing world are attractive.
G) The rest of the world is geared toward selling consumer products to the U.S. consumer. They have a huge stake in the revival of U.S. consumption.
H) The U.S. economy and the consumer are resilient and will be highly adaptive to the headwinds they face, despite opinions to the contrary.
I) When (assuming) the global economy starts growing robustly again, inflation will come back quickly.
J) U.S. unemployment rates may not come back down in the near-term as the U.S. economy must make a tectonic shift from the hyper-activity of building automobiles, houses, condos, strip malls and office buildings – to doing something else – at least for the next 5 to 10 years.
K) The fiscal deficits of the U.S. government are unsustainable and highly problematic without serious sacrifices.
L) Industrialized governments have made significant promises to their retirees that are significantly underfunded.
M) Higher taxes are on the horizon.
N) Financial markets still have significant negative exposure to commercial real estate assets that could be disruptive to economic expansion.
O) The government may to have to make additional capital injections into financial institutions in order to absorb future losses due to write-downs associated with commercial real estate (which have not yet been taken). Such injections may destabilize financial markets once again.
P) A multi-year bull market may take stock market indices back to old highs, but a return to the good old days like the 1980s and 1990s where indices rose 15-fold is probably not in the cards until the ‘structural headwinds’ mentioned above have been addressed. This may mean another decade of volatile markets similar to the 1960s and 1970s.
Investment Implications
Based on the outlook above, we believe investors may need to be more proactive and nimble than they have been in the past. This may require considering new investments ideas, timing strategies and examining yield as an important slice of total return. We will continue to make investments in companies with exposure to basic materials (commodities) and emerging markets, either through the purchase of fixed income or equity instruments. In addition, we want exposure to investments that benefit from an improving global economy or can benefit from an inflationary environment. If you want specifics, we encourage you to contact us. These are our prognostications -- for now.
Written by Jason McMillen, Chief Investment Strategist, PPWM
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