I recently had the pleasure of addressing a large group of pension fund managers. That talk & this piece fleshes out two themes of mine - one old and one new. The old is the Tri Polar World View (TPW) - an environmentally sound, socially aware and pro governance global growth model. The new is the coming revolution in the long term investment management (LTIM) space which I expect to have an effect akin to the Yale Model. The trifecta of low returns, rising longevity risk and deteriorating demographics requires it… the question is how to survive it. See inside for a 7 step program to do just that.
Its true: I was seeking inspiration when I spent some time in the fabled Writers Room at Washington, D.C.‟s Cosmos Club. I doubt, however, that I was alone in seeking inspiration – policy makers and investors alike seem to be falling back onto the same monetary policy playbook, and that‟s a problem. The ECB talks and the PBOC walks, risk assets bounce while the data disappoint. Yet monetary policy alone is unlikely to be sufficient to offset the looming threat of global deflation.
Nine months into the year and 2015 has already been a wild ride. As foreshadowed in the 2015 Outlook piece, it‟s been a year of tough choices, and that remains the case as the fourth quarter looms (see “2015 Outlook – Tough Choices Ahead,” published on December 2, 2014). Today the choice is whether or not to believe in the Big Fear, which suggests that investors are losing faith in policymakers‟ ability to influence the world‟s two largest economies: China and the US. And we all know what we do when we lose faith.
We're the Bi-Sectoralists. One from the private sector world of global finance and markets, one from the public sector world of foreign policy in Washington and academia. We're tired of the "you're the problem -- no, you are" finger pointing between the public and private sectors. Both are. Both sectors need to get their own acts together, and to work better together if we're going to have any chance of revitalizing domestically and competing globally.
Amid the recent noise about Greece default risk and China bubble trouble, a much larger and more important issue is taking shape: the growing likelihood of a global recession. Investors and policy makers alike have been focused on the reflation story driven by the developed market (DM) economies of Europe, Japan and the US growing together for the first time since the Great Financial Crisis (GFC). However, the emergence of a sharp slowdown throughout the emerging market (EM) economies risks overwhelming that positive story. Recent price action in commodities, EM equities and DM sovereign bonds suggests a sea change might be in order.
Iran has been closed for about 35 years, so a recent visit was an unusual event. On the ground, Iran reminded one of earlier economic and market transitions such as Latin America at the turn of the 1990s or Russia and central Europe in the mid-1990s. Salient features include underutilised labour, a state-controlled economy, brain-drain and immature capital markets. However, Iran has some unique characteristics that suggest a nuclear deal could stimulate an accelerated transition.
I had the eye-opening experience of spending a week in Iran recently, and what a week it was. As an American, the gap between what passes for common knowledge about Iran and the on-the-ground reality seems as wide as a country closed for 35 years would suggest – HUGE. While I was in Iran, the S&P moved less than 1%, but there was lots of action in the currency and commodity space, and that has generated some fresh USD thoughts. Dollar first, then Iran.
The global economy remains listless: buffeted by weak oil, falling prices, lack of demand, the absence of fiscal stimulus and a near-total dependency on monetary policy. Roughly 25% of Europe’s sovereign bonds offer negative yields, the US remains stuck on a 2% growth path, China is slowing rapidly while Japan seeks to bolster a weak recovery.
The start to 2015 has been a two-sided tale. January: full of fear. February: low oil, no worries; Greece, kick save and a beauty; Europe, news gets better and QE hasn’t even begun; U.S., about to jump-start the global growth engine of old.
2015 has started off right where 2014 ended – with a tricky state of affairs for those in the investing business. Trends have extended – good for trend followers, worrisome for most of the rest. Questions abound and answers are few; I have some thoughts, how ‘bout you?
From a global economic perspective, 2014 is likely to be fighting year; recent economic data suggest a fight against disinflation, if not deflation, lies ahead of developed markets (DM), while the emerging economies (EM) are simply in a fight. The boxer Mike Tyson famously once said everyone has a plan till they get punched in the mouth – well, the emerging economies have been punched in the mouth and are groping for a plan. In keeping with the perverse nature of the current environment, the fight‟s outcome may well see equities declared the winner in a technical decision over bonds.
No, the title does not refer to a prescription drug advertisement but rather to how the various financial asset classes have acted over the past few months. From July thunderstorms to August fireworks and on to September’s multi-asset selloff, few investment strategies have been left untouched.