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Professional Perspective

Professional Perspective

September 25, 2012 by Lesjak Planning

We thought it would prove useful to provide the results of recent conversations with and observations of some of the leading money managers and analysts regarding the current investment climate and their views on getting the U.S. economy rolling again.

The consistent theme that runs through these professionals is: 1. That the world seems more uncertain than any other time in their investment lives, which for a few span over 50 years. 2. Their collective belief is that we are going to see sluggish growth in the U.S. for a prolonged period of time.

In the next few paragraphs we will consolidate their thoughts as to why they feel this way and their perspective on how to profit from such.

Economic growth doesn’t just happen. Its vigor depends on a combination of population gains, a conductive infrastructure, positive aspirations and profit motives, and advancement in technology and productivity. Let’s touch on their views.

  • In the years leading up to the crisis in 2008, consumers could grow their spending faster than their income due to the increased availability of credit. From credit cards to home equity loans, money became inexpensively available. These generous capital markets also lured governments into the borrowing fray. Few recognized that this increased both the leverage and the dependence on the continued generosity of the capital markets. In other words, unwise behavior in the short run led to problems in the long run. After the financial crisis, lenders now actually care about the borrower’s ability to repay their debts and credit has dried up considerably. Consumers have taken this crisis, for whatever reason, to determine that they no longer want so much debt and currently are paying down debt at record rates. While this trend is healthy for individual balance sheets, they imply reduced consumption and are thusly negative for GDP growth. Less consumer credit results in less economic growth.
  • Psychology plays a huge role in economic growth. If people think the future looks good, they will spend and invest and things will be good. Conversely, if they feel pessimistic about the future and hunker down refusing to spend and invest, economic growth will slow down. The events of the 2008 crisis traumatized many who lost jobs, and saw home prices and investment values plunge. Constant pounding by headlines of financial Armageddon and corruption in the banking business wore on even those that were not directly affected. These are deep wounds which will take time to heal.
  • Business plays a key role in any recovery. When managers conclude that consumers are about to resume spending after a downturn, they hire new workers and invest in new equipment in order to meet the demand they think is coming. We are not seeing this spending in any great numbers yet. This is greatly attributed to uncertainty by executives concerning the business environment. In contrast to the preceding 28 years of pro-business and pro-free market administrations, today many business people detect indifference on the part of the current administration in which the private sector is little represented. In addition, there is uncertainty and anxiety regarding the outlook for the economy, regulations and taxes. These all result in the hoarding of cash and deterred expansion.
  • The depressing state of politics also deserves mention about the problems we face. Having acted in unison in the past to create unfunded, ballooning benefit burdens, politicians now largely refuse to agree on action to reduce them. No one seems to be penalized for failing to find a solution. Too many areas have become off limits for them and compromise seems to be a dirty word.

It’s easy to view these problems as unsolvable and part of a self-feeding vicious circle. It is essential, however, to remember that it can be just as wrong to see things as hopeless as it is to consider an environment risk free. Economic pluses do exist and they tend to get overlooked in downcast periods. They include the continuing housing recovery; possibility of energy self-sufficiency; the more lean U.S. manufacturing industry and the Chinese dealing with increasing manufacturing costs; and the fact that the U.S. still leads in higher education, creativity and entrepreneurship.

The simplistic view is that because the world is so uncertain today, we shouldn’t venture forth. But, it’s much wiser to say that despite the uncertainty, we shouldn’t automatically settle for assets believed to be entirely safe, especially since (a) flight of capital to their seemingly safety has rendered their promised returns low and (b) that safety can prove to be illusionary. Instead, we should attempt to take control of our fate and strive for reasonable returns with the risks handled responsibly.

The presence of arguments on the markets direction makes strategy setting difficult today. But as a great investor once stated: “It’s not supposed to be easy”.

So in conclusion, our discussions with the best in the business have us in agreement that the outlook certainly isn’t so rosy as to call for investing aggressively, but at the same time, market conditions tell us this isn’t the time for hiding under the bed. Move forward, but with caution.

We continue to monitor and adjust portfolios to help prepare for the various scenarios that could unfold. Using the various investment styles available, we can diversify to help reduce volatility while taking the returns that the markets give us.

Be careful with fixed income investments, use quality high dividend paying companies, and diversify into non-market correlated sectors.

So what is the proposed strategy these professionals see going forward if this environment is to continue?

First, the unanimous belief is that the riskiest thing in the investment world is widespread belief that there is no risk. Usually that dangerous condition stems from excessive conviction that the future is knowable and known. Today there is very little of that and that in itself is positive.

There is concern for investors that have moved completely out of equities and into the perceived safety of Treasuries and bank CD’s. By accepting the lifetime low returns on these savings vehicles, they have put themselves at risk of inflation rising and reducing their overall return to a negative number which is currently happening.

The flight from equities by even many professionals have them substantially underinvested, and in a good market year like the current one has them trailing the S & P 500 by a considerable margin. When equity risk is perceived as knowable and investors retreat, the prices of company stocks in relation to their valuation becomes quite favorable. This is what the equities look like today – historically fair valued. The belief is that the underinvested managers will need to buy stocks to try to improve performance relative to the S & P 500 to save their bonuses and jobs.

If for the near future, corporations will be holding onto cash until the economic landscape improves, then we can take advantage of the attractive dividends they are paying on their shares. These dividend yields far exceed the yield on Treasury bonds.

About the author

Lesjak Planning

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