A group of the best-known names in the financial markets offered their outlooks for the U.S. and global economies during an online forum Tuesday, and it's fair to say overt optimism was in short supply.
The Web-based presentation, which covered several topics, including the fiscal cliff, Europe, China, jobs and corporate earnings, was led by John Mauldin of Mauldin Economics. Also taking part were Pimco's Mohamed El-Erian, Barry Ritholtz of The Big Picture blog and FusionIQ, economist Richard Yamarone from Bloomberg, economic consultant A. Gary Shilling, fixed-income expert James Bianco of Bianco Research and mortgage-industry executive Barry Habib.
Not surprisingly, the fiscal cliff, and the question of how meaningful it really is, opened the conversation, and aspects of it factored heavily throughout the talk, which was predicated on what investors should do now that the elections are over, President Obama has been re-elected and Congress is set. For his part, Mauldin indicated he's anxious to get the cliff issue resolved, but he said that even if it is straightened out, the United States still has bigger concerns that have to be addressed.
"The problem is the deficit and the ever-increasing debt of the U.S.," Mauldin said. "The fiscal cliff is a problem, but it's another step, another crisis, on the way to dealing with the true issue."
Yamarone pointed out that fiscal cliff, which first emerged several months ago and has gathered steam as its possible arrival at year end has gotten closer, was the No. 1 concern executives cited on their conference calls during the most recent earnings season. "Corporate CEO confidence has plunged in the third quarter because of the fears of the uncertainty surrounding the fiscal cliff," he said. "Businesses are not hiring, and small businesses are not as well."
Companies also are reluctant to spend, he said, and that's weighing on gross domestic product. The nation, Yamarone said, is operating at a 2% year-over-year pace for GDP, and that's simply inadequate. "It's like pedaling a bicycle," he said. "If you don't pedal a bicycle, you fall over. That's the law of U.S. GDP. If you're only pedaling the GDP at 2%, you fall into recession if you're anything lower."
Corporate America May Be the Real Worry
Ritholz, meanwhile, isn't as worried about the fiscal cliff as he is the numbers coming from the corporate side.
"I don't really care about the fiscal cliff," he said. "The worst-case scenario about the fiscal cliff is we'll lose $600 billion in spending we can't afford and increase taxes that we should have increased a while ago. $600 billion in a $14 [trillion] or $15 trillion economy is a relatively modest impact. Might it cause a slowdown? Sure. If we're running a 2% GDP, and this takes half a percent off, we're now running a one-and-a-half-percent GDP."
So with that said, he doesn't expect a steep slowdown to be the outcome. "The United States, partly due to [quantitative easing], partly due to a very healthy set of balance sheets in corporate America, has been muddling along better than lots of the rest of the world," he said. "Doesn't mean though that's a forever situation. There's a tendency among economists to just extrapolate wherever we're going, and that's how they end up missing the turn."
Mauldin, however, does believe it's going to be a significant problem for the country if the cliff is crossed. "It's a major recession, and that will even have more impact on earnings," he said. "The economy cannot absorb something that's the equivalent of a 4% negative hit."
Pimco's El-Erian predicted the White House and Congress will come together and manage to avoid the fiscal cliff "mainly because the alternative of pushing us into recession would be awful." He's looking for some kind of compromise that will avert an economic slump and lead to fiscal reform down the road. "If we go off the fiscal cliff, unambiguously we go into recession," he said.
He's also expecting more QE from the Federal Reserve. "They're going to stay very active, not because they think it's the right thing to do, but they think it's the only thing to do"
Shilling pointed out that the U.S. central bank is already purchasing up to $40 billion of mortgage securities a month, which it plans to do for as long as it sees fit. "What more can they do?" he asked. "They've really run out of bullets."
For Yamarone, worker pay is a major concern for the U.S. and one that isn't being properly acknowledged. He noted, for example, that even workers who are getting hired now after being out of a job for months or years often are getting paid less than they were, which of course inhibits their ability to spend and the taxes they can send to Washington and their state capitals.
"I think the biggest problem that we face is not the political uncertainty," he said. "It's diminished incomes and wage growth." On a related point, he said too many American workers are in the services sector, some 82% by his count, and that's a significant trouble spot for the U.S. "55% of everything we spend is services," he said. "It's all services. Services don't respond to Fed policies. That's why we're doomed."
What Should You Buy?
The session closed with a few ideas on where individual investors can put their money in these uncertain times, and at least some degree of fixed-income ownership was recommended more than once. Conversely, no one pounded the table over stocks.
Uninspiring revenue and tepid earnings are among the factors that "suggests that this cyclical rally that began in March '09, and here we are four years later, is getting a little long in the tooth," Ritholtz said. As he alluded to, major U.S. averages have doubled since the recession lows of early 2009.
Investors, El-Erian said, need to adopt a few principles to invest by. One of his key points was the importance of respecting central banks. "Central banks are hyperactive," he said. "They are now participants in markets. They're no longer the referee of the investment game. They're now a player on the field. Therefore, understand what they're doing and recognize that they will influence valuations, but not deliver economic outcomes."
El-Erian said that in the next year, he's looking for the yield on the 10-year Treasury to be in the 1.50% to 2% range, adding that he thinks the 5-year and 7-year notes should be the best place to be on the government side.
Shilling proposed a strategy that would involve owning Treasuries and the dollar, while shorting commodities and shorting or avoiding stocks. Mauldin suggested he likes Treasuries for a trade, though not necessarily as an investment to hold on to for too long. He also said he would look at managed futures and other alternative investments, along with certain stocks with strong balance sheets or considerable intellectual property. "There's places to put money to work," he said. "There's not as many."
Bianco agreed that pickings are on the slim side, and he expects the markets to be depressed for a while. "It's really hard at this point to separate it out and say you should be investing in defense, or agriculture, or technology, or utilities or banks," he said. "It's whether you should be investing at all in the United States or outside the United States."
Yields are going to stay low for quite some period of time, he predicted, despite the fact that most economists are of the mind that rates will be rising. "They haven't for many years, and I don't think they're going to for many years," since Fed bond purchases will keep yields low.
So where's he looking for a satisfactory rate? At the moment, there's hardly anywhere to go, Bianco said.
"Stop going for yield, because we're in a world where there is no yield," he said. "Be lucky that the numbers are at least positive, unlike they are in Switzerland, where they have negative yields right now. I'm going to stick with the lower-yield, safer instruments. I'm not going to reach out for high yield or emerging markets where I think that those markets are starting to get a little bit frothy."
Do you think the fiscal cliff is the nation's biggest problem? Or is it the deficit, or wages? And where are you putting your money these days?