A long, cold winter
This post features a recent Barron’s interview with Stehanie Pomboy.
She is the founder of Manhattan-based MacroMavens, a firm striving to identify major macro themes – and the commensurate investment implications – ahead of the curve, while avoiding the typical overemphasis on short-term swings.
Pomboy is bearish and of the opinion that it will take consumers at least five years – and probably more – to recover from the credit crisis. She is convinced that a long period of paltry US economic growth is in store – akin to what happened in Japan in the 1990s. Her views and forecasts, as expressed in the Barron’s interview, are shared below.
Barron’s: How bad has the macro economy become?
Pomboy: It is certainly the toughest one any of us has lived through. My fear is that it’s actually just in the early stages and that it is going to get substantially worse on the economic side, although all the government measures that have taken place so far might help to insulate some of the damage on the financial side.
What about the short-term outlook?
Having been bearish, for me the real challenge is to identify the turn. One thing at work right now is what I call the cattle prod – essentially the Fed poking people to take risk. They are taxing cash by having negative real returns on cash. At the same time, yields on investment-grade and junk bonds are incredibly alluring. You can pick up 15 percentage points over cash buying junk bonds. Or you can pick up 8.5 percentage points on investment-grade paper. At some point, the cattle prod will get people moving, as it did in March of ‘03 when the market turned.
What else do you see happening in the near term?
With the government guaranteeing all manner of private-credit claims, many investors may decide to get long “socialism,” for lack of a better term. Or, as some euphemistically put it, this is partnering with the government. So in the short run, we could see a rally in risky assets and a selloff in Treasuries. But the economic deleveraging has barely begun, and that’s my longer-term thesis. It all revolves around the idea that US consumers are actually going to do the unthinkable – they are going to save – and that we will be more like Japan than anyone believes is possible.
Hence, consumption declines.
Right. Wages have been silently crowded out by benefits as a share of total compensation, as companies look to offset rising health-care costs. The result is that the share of income that consumers can actually spend is at its lowest in the post-war period. It had not been a problem, because consumers would just borrow to fill that gap. But now, they don’t have appreciating assets against which to borrow. So while we could get a rally in risk assets – including high-yield debt – it’s likely to be a short-term rally within a context of a secular bear market.
Any other important longer-term trends you expect?
We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that.
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Source: Lawrence C. Strauss, Barron’s, December 13, 2008.
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