Post-Election Economy: Analysis of Investment Risks and Opportunities in 2013


This is a summary of the webinar given by John Mauldin of Mauldin Economics on Tuesday, November 20, 2012. For those interested in more details about investment advice, please register at Mauldin Economics to watch the re-broadcast of the video presentation. The purpose of this post will be to review the insights of the panelists regarding the economy in 2013.

1. About John Mauldin

I first learned about John Mauldin and his investment advisory company from a friend of a college friend of mine who went on to earn his MBA and who now runs his own investment firm managing pension funds. Based on my friend’s advice, I started subscribing to the John Mauldin newsletter over a year ago, and have appreciated his insights into the economy ever since. He is the author of the book Endgame: The End of the Debt Supercycle published last Spring. When I heard in his newsletter that he was having a webinar about the post-election economy, I made a point to tune in and watch it.

2. List of Panelists

Here is a list of the panelists who spoke on the program.

Lauren Lyster, moderator

John Mauldin of Mauldin Economics

Mohamed El-Arian, CEO of PIMCO

Barry Ritholtz, CEO of FusionIQ

Rich Yamarone, Senior Economist, Bloomberg Brief: Economics, Professional

Gary Shilling, President of A. Gary Shilling & Co., Inc.

James Bianco, Bianco Research

Barry Habib, Vice President & Chief Market Strategist

3. Economic Risks

The following risks to the economy in 2013 were discussed on the program. I have listed them in the order of those risks with the highest perceived combination of probability, impact, and urgency.

Here is a summary of the discussion among the panelists regarding the risks facing the global economy in 2013.

 

Economic Risk

Explanation

1.

“Fiscal cliff”

If no deal reached, $6B in spending cuts (sequestration will occur) and taxes will increase, which will lower deficit automatically. However, this will cause the immediate slowdown from current 2.0% to 1.5% GDP growth. Only lower growth if S&P downgrades US economy, perhaps down to 1.0%. Worst case scenario: recession + 9% unemployment. Negotiations need to bring in new revenue somehow. Panelists estimate of the chances of US Congress reaching a deal on the fiscal cliff ranged from 50-70%.

2.

Corporate earnings plunge

Currently operating at 2.0% GDP growth in US. Business confidence fell in the 3rd quarter 2012. Productivity growth not increasing past two months, despite corporations decreasing costs. On worker side, real median income down 7% over past decade.

3.

Eurozone

EU going into recession, negative 1-2% contraction. 50% chance of repeat of same problems that happened in July 2012.

4.

Chinese economy hard landing

China growth may slowdown from 8% current growth to 5-6%.

5.

Oil/energy shock

US scheduled to be self-sufficient in oil by 2020; already self-sufficient in natural gas. However, geopolitical problems may cause oil prices to rise in short term, with spillover effects on the collapse of the recent bubble in commodity prices.

6.

Middle East

Flare up of geopolitical problems in Middle East (Syria collapse, Israel/Iran, Israel/Gaza),

 Here are some additional comments from panelists on some of the topics listed above regarding the risks and the possible opportunities that may counter them.

i. Fiscal Cliff

John Mauldin said that the election probably made a deal on the fiscal cliff in the next 30 days more likely with the election of Obama rather than Romney simply for the pragmatic reason that the people doing the deal would already be in place. There have already been behind the scenes conversations because the leadership on both sides want to address the deficit, although they have different visions of how to do it.

All panelists agreed that there must be an increase in revenue to accompany a reduction in spending. Most felt that this would have to come to a certain extent in increased taxes, but some (Gary Shilling) did not agree. The minority opinion was that revenue could be created through the reduction of tax loopholes. However, in contrast to that, the majority felt that a deal that tries to remove tax deductions that are popular with the middle class such as the one for mortgage interest would create popular political pushback. The last time they tried to axe the mortgage interest deduction was in 1986, and there was “million realtor” march in Washington that put an end to that idea.

In Japan, the government will also be trying to print more money to prop up the currency against the Chinese yuan. Many manufacturing sectors are struggling due to competition, particularly from South Korea, but robotics sector continues to do well.

ii. Corporate earnings

Because of the global slowdown, most panelists agreed that in general, shifting from stocks and commodities to long-term treasury bills would be more prudent. The US government should be focusing on those steps which encourage intellectual innovation, which will create economic activity. John Mauldin in particular likes investing in companies that have strong IP as well as balance sheets.

iii. Eurozone

Because of the problems in the Eurozone, non-EU entities in emerging markets (Asia, MENA, SA) will give better dividends, particularly in those areas like telecoms and manufacturing.

iv. China

The emerging leadership in China is trying to make investments in infrastructure and education that will help reduce the negative impact of the global slowdown.

v. Oil/energy Shock

Energy is probably not what you want to invest in now, because of the possibility of a global slowdown. The wild card in this, of course, is the possibility of a spike in oil prices that would be a result of any geopolitical flare-ups in the Middle East.

3. How to turn economic risks into opportunities

Here are some of the suggestions by the panelists on how to turn these economic risks into opportunities.

Suggestion Explanation
1. Watch Central Banks for clues to Monetary Policy in US, EU
Don’t get paralyzed by complexity and fluidity; Central Banks’ moves will contribute to stability of the system.

Example: ECB in Europe is trying to open the spigots, so far to no avail. In US, Fed will do QE3 and QE4, also to little effect.

 

2.  Avoid Inertia  Don’t get stuck in the status quo thinking that what is happening now is only temporary. We are not going back to the 1990s for the foreseeable future 
3.  Emerging Markets Other parts of the world will navigate the global economy better than EU, US.

 

4. Look to Fiscal Policy in China, not US Fiscal policy impotent in US because of political gridlock regarding fiscal cliff; in China, however, new leadership doing extensive investments in infrastructure and education.

In general, there are opportunities for investors as long as they are first aware of where the risks are in the economy both in the short term and the long term.

The general consensus of the panel, in my opinion, regarding the global economy in 2013 was the following: rather than a bearish market that looks for the highest yield, we are in general facing a bearish climate where the most positive outcome in the US would be a deal that it reached to start a slow reduction in deficit that does not put the brakes on the economy too quickly. It will not be an easy world to make money, but targeted opportunities may prevent you at least from losing it.

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