As Chairman of Guggenheim Investments and Global Chief Investment Officer, Scott Minerd guides the firm’s investment strategies and leads its research on global macroeconomics. Mr. Minerd was the keynote interviewee at the Thomson Reuters Lipper Alpha Forum earlier this year. Please note that this is a summary review – not a transcript. Watch the video in full below.
US economic growth is robust, unemployment is falling and wages may rise by up to 4% this year. The US Federal Reserve is deferring rate increases in an effort to continue growth while global central banks appear to be engaging in “group think” through quantitative easing and negative interest rates.
China is a concern, as policymakers appear to be exacerbating years of mal-investment through continuing stimulus programs. Global oil prices are coming back into balance, but US political campaigns seem hostile to free trade and immigration and eager to increase taxes. These are not pro-growth policies.
Q: What is your outlook for the US economy in 2016?
A: Investors seem to have confused correlation and causality. They see risk assets decline during recessions, but forget that risk assets have come under pressure many times without recessions. Every recession in the United States has been preceded by at least three months of decline for leading economic indicators. They’ve also been preceded by an inverted yield curve (in which long-term debt has a lower yield than short term debt of similar quality). For the yield curve to invert today, we would need to see far greater monetary restrictions than we currently have.
We are today adding more than 200,000 jobs per month; by the end of the year we may have 4% wage growth. The recent decline in gasoline prices will add about .7% of output this year. It would take a massive event to forestall the economic growth that we are now experiencing.
Q: What about Fed rates and global central bank policies?
A: If we were today adhering to traditional Fed criteria, we would have had a rate increase in March. Financial markets today are holding the Federal Reserve hostage. The Fed would like to raise rates, but only were we to be experiencing a higher rate of inflation. Janet Yellen is highly sensitive to employment and she will be willing to tolerate quite low levels of unemployment, which could drop to 3.5% before the current expansion is over.
For their part, global central banks have gotten into a “group think” – Japan, then the US and then the Europeans undertook QE and now they are experimenting with negative interest rates. The efficacy of monetary policy is diminishing. The velocity of money (frequency at which the average currency unit is used to purchase newly domesticated goods and services within a given time period) declines as interest rates decline. Today, the slowing velocity of money, which seems to be leaving the banking system, is nullifying the impact of qualitative easing.
Q: What might be the impact of negative interest rates?
A: Central banks are seeing the impact of pushing down the term structure, which has reduced financing costs. Europe is very concerned about fragmentation – where interest rates in Germany are different than Italy, and so on. Negative interest rates might reduce fragmentation, but the reduction in debt service for governments wouldn’t be that profound. At the same time, negative interest rates have failed to inspire investors to buy risk assets.
Q: Is China adequately addressing their financial concerns?
A: No. The Chinese need to devalue its currency, the renminbi (RMB). Beggar-thy-neighbor currency devaluations in Asia do nothing for aggregate demand. And this policy is effectively hollowing out Chinese exports. China appears to have a political goal of being a respected leader in global monetary policy and for the RMB to have reserve currency status. Because of this, they don’t seem to be willing to let the currency devalue,
Despite widespread mal-investment in the wake of the financial crisis, I’m startled to see China treating a hangover with a Bloody Mary. China is once again engaging in stimulus, which will help prop up domestic output and forestall devaluation, but only over the short term. It will do nothing to address the structural problems that China needs to address.
Q: What is your outlook for oil and its impact on the global economy?
A: We’re in the endgame for the decline of oil prices, but we’re not out of the woods. We are currently experiencing over-production and demand that is beginning to return. We should get into balance between production and consumption by the end of this year. My year-end oil target is $45 and between $55-60 at year-end 2017.
Q: What risks are dominant in today’s markets?
A: Global terrorism and the state of US political affairs are both preoccupying. Some US Presidential candidates have opposed immigration reform and free trade. Some on the left would like to dramatically raise income taxes. These are not pro-growth policies – they are ideas more appropriate to the 19th century.
Q: Your firm is known for embracing behavioral financial theory in your investment processes.
A: You have to remove emotion from financial market trading. We segregate duties through specialization in the belief that doing so will improve efficiency. By segregating securities selection, macro analysis, portfolio design and portfolio management, we can reduce emotion in financial processes. When a portfolio manager is allowed to dominate all duties, you can end up with “shoot from the hip” investment processes.
Thomson Reuters Lipper Alpha Forum, New York, March 22nd, 2016.