Panel, Conference Presentation
Reading the Tea Leaves: Where Are Markets Headed?
Milken InstituteJohn Calamos Sr., Anne Casscells, George Evans, J. Todd Morley, John Rogers Jr., Christopher Ailman, Chris Ailman
- Global growth is projected to slow to a 2% sustainable rate driven by demographics in the U.S. and near 0% in Europe, with the U.S. transitioning from a 3% to a 2% environment over the long term, though some predict temporary 3-4% spurts or 4% growth as the economy strengthens and family formation increases.
- A 10-year deleveraging period is anticipated to be midway, potentially extending to 15 or 20 years, with GDP growth determined by population and productivity additions, while the developed world faces a non-zero interest rate world with inflation expected in the 2% to 3% range by 2016.
- Specific economic timelines include Quantitative easing unwinding in 2015, Bernanke stepping down as Fed head in 2014, inflation significantly rising after 2016, and normalizing rates with the Fed funds rate reaching 3% to 4% and the 10-year Treasury at 4.5% to 5.5%, alongside P/E ratios of 20 on operating earnings.
- Market dynamics are characterized by a shift toward riskier assets and equities due to increased consumer comfort and spending, with manufacturing returning to the U.S. over the next 5 to 10 years due to energy costs, while mobile data generation trends are expected to triple and remain sustainable for 5 to 10 years.
- Investment strategies favor natural resources (oil, gas, water), private equity (KKR), emerging market growth (Diageo), and mid-market lending for high returns, while advising shorts on paper assets (currencies), long-dated bonds, European financials, and consumer goods with unjustified multiples.
- Significant risks include a potential double-dip recession, excessive leverage built over 1-2 years, sovereign debt insolvency in the U.S. and Eurozone leading to devaluation, a cataclysmic Eurozone currency run, geopolitical threats like nuclear terrorism, and the potential for sudden violent inflation similar to 1973.
- Macroeconomic outlooks vary from cautiously optimistic views where unemployment falls below 5% and housing recovery drives jobs, to warnings of "zombie markets" requiring forced liquidation ("omega moments") and a systematic rotation from paper to hard assets to mitigate deflationary pricing.
- Portfolio construction advice suggests institutional investors adopt enhanced fixed income strategies, individuals hold equities through their 60s due to longevity, and returns in the new normal may average around 4%, while global equity is preferred over regional exposure due to capital misallocation risks in Japan and Europe.