[This article originally appeared in our June 2015 issue of ETF Report.]
We speak with macro experts on their outlook for the U.S. economy going forward.
Rogers may be the world’s best-known commodity investor, with his Rogers International Commodity Index and best-selling books on commodities and financial markets.
The S&P 500 is trading close to record highs. What’s your take on U.S. stocks?
Well, you just answered the question when you said “record high.” I don’t like to buy high and hope it goes higher. I prefer to buy shares in markets that are depressed—China, Russia, Japan. They’re countries where markets are very, very depressed, and I prefer to buy in places like that.
Similarly, are you avoiding the U.S. dollar right now because it’s gone through the roof and is close to 12-year highs?
I do own the U.S. dollar. I’m certainly not rushing out to buy at the moment. I’ve owned it for a couple of years and I’ve been quite vocal about it. I don’t have any confidence in the U.S. dollar to lead long term. After all, America’s the largest debtor nation in the history of the world, and our debts are going higher and higher all the time.
The reason I own the dollar is because there’s more turmoil coming in the world, and during times of turmoil, many people flee to what they think is a safe haven, and the U.S. dollar’s perceived as a safe haven. It’s not for me, but some people think it is, so I own it.
I would not be surprised if the dollar turns into a bubble in a year or two or three as we have more turmoil. You see what’s happening to the Japanese yen, the Russian ruble, the euro, the Australian dollar, the Canadian dollar—the list goes on and on.
The U.S. dollar could turn into a bubble down the road. If it does, and if I’m still there, and if I’ve got any brains, I hope I’m smart enough to sell it.
Antia is the founder and chief investment strategist of Macro Insight Group. Previously, he held a number of leadership roles at the New York Federal Reserve.
How are you feeling about the U.S. economy and equities right now? What’s your feeling going forward with this persistent strong dollar?
The U.S. economy clearly had a very poor first quarter, but we’re poised to do better over the rest of the year, the growing head winds notwithstanding. I expect the GDP growth to rebound in the second and third quarter. There are some indications that consumers will start to spend some of the fuel cost savings that they’ve been accruing.
I expect inflation to stabilize over the summer and then to start to trend up in the fall. The punch line for that is that I expect the Fed consequently to be extremely patient with the economic rebounding prices. And I don’t expect an interest rate increase before December.
What does that delay mean to an ordinary-citizen investor? Is it important for investors to worry about when the Fed will raise interest rates?
What that means for markets is that a slow-moving, deliberate Fed is generally supportive of stocks, both here and abroad. Valuations tend to be a bit richer here, but looking at equities broadly in the U.S., the combination of the patient Fed and the better growth outlook means that equities are likely to have some more room to run.
So yes, U.S. equities have had some more room to run, but I anticipate there will be fewer record highs than the last few years as some of these head winds continue to grow. There are two head winds in particular I’m thinking about: One is a stronger U.S. dollar that actually challenges earnings. The other is short-term and medium-term rates rising in anticipation of Fed action. And we’ve already seen that happening.
What are some other worrisome spots?
One area that is a concern for me and that I’ve started to think about, when I look forward six, 12 months down the road is that I’m seeing very few real drivers of strong growth or excessive inflation. Yes, disinflation and inflation are stabilizing, but I’m not seeing any signs of runaway, really strong, robust growth or excessive inflation. The typical drivers of growth over the last era have been emerging markets, the U.S. consumer. It isn’t clear that anyone is stepping up and taking leadership to sort of drive global growth going forward.
So that’s one concern for me. There are unintended consequences that are going to be out there that are not quite foreseen at this time.
Minerd is the global chief investment officer at Guggenheim Partners, which has more than $220 billion in assets under management.
What’s your outlook for the U.S. economy going forward?
The underlying fundamentals for the U.S. economy are as good as they’ve been at any time in the expansion. We’re getting a robust increase in purchasing power by wage earners. This reflects the success of the Fed’s policy.
They’ve been focused on reducing the unemployment rate, and we’re starting to see minimum wage increases. We’re going to get some increased growth in wages, especially among low wage earners, who have the highest marginal propensity to consume. That will directly translate into consumption growth.
The one caveat I have is that the economic data for the first quarter is likely to come in a lot weaker than people are currently expecting. We’re having a replay of what happened in the first quarter of 2014, where weather distortions caused the economy to slow dramatically. I wouldn’t be surprised to see growth basically go to zero in the first quarter.
Ultimately, given the underlying fundamentals and the underlying strength, the rest of the year will be just fine, and there will be good momentum to go into 2016.
There’s been a growing demand for international stock ETFs in recent months. Do you think the rally in U.S. equities is running out of steam?
The valuation of the U.S. market is getting rich. European stocks and some Asian stocks are better values than U.S. stocks. Against that backdrop, I think if you have money to allocate to equities, you should have a significant allocation overseas as opposed to the U.S.
But as for the U.S., even with earnings coming under pressure from currency translations, the multinationals and the depressed earnings we’re getting out of energy, we still have room to have multiples expand. I expect over the next 12 to 24 months that U.S. equities will be, on balance, 10 to 20% higher than where we are today.
What’s your outlook on rates? Do you have a view on what the Fed will do next?
The Fed really wants to get started raising rates. Originally, my view was that 2016 was going to be the start, but recently I’ve moved it up to September 2015. That really has a lot to do with the comments by various Fed presidents and Chairman Janet Yellen herself regarding concerns about asset bubbles.
But my understanding is that even if it raises rates by 0.25-0.50%, monetary policy is still going to be highly stimulative, so it would be better to do a pre-emptive move this year and set the stage for being able to normalize rates in the long run if it were to see an asset bubble take hold.
What the Fed is trying to avoid is doing anything sudden or extreme.
What’s the weakest spot in the U.S. economy? What should we be concerned about?
The No. 1 weakest spot is energy. There’s reason to be concerned about a continued decline in oil prices. The supply/demand imbalance is very large, and we’re producing too much oil.
The ability to absorb the overproduction of oil, which is in the range of 2 million to 2.5 million barrels per week, is really becoming constrained by the storage facilities at Cushing, Oklahoma. We will, at the current pace of production, run out of storage capacity at Cushing in about another six weeks. If we reach that point, oil could come under significant downward pressure as a result of just having to dump production onto the spot market at any price.
Ultimately, that will be good for the economy and will probably give us a buying opportunity in the energy sector, but in the near term, we’re vulnerable to seeing another down-leg in energy.