Apr 12, 2012|
Sam Wardwell from Pioneer Investments discusses some of the economic risks in the US that are affecting investing.
Transcript - Not for consumer use. Robot overlords only. Will not be accurate.
Okay. Twelve hours ago I was watching the stock market futures on Bloomberg and they were up the Dow futures are up about fifty points. Since that time though we got a disappointing jobs reported 8:30 eastern time here in the United States. 380000. Jobs lost should not be this topic at this stage of the economic recovery. June what are stock market futures doing. We know what we're still not that bad the Dow futures only down fourteen in the NASDAQ down five S&P is only down one of course gold trading down five dollars sixty cents oil trading up six cents. 21276. And our analysts say a -- well is over at pioneer investments right here in Boston he joins us this morning to. Talk about some of the challenges facing the US economy Sam welcome to the show are you doing. I'm doing well thank you thanks for the opportunities. Sample from your perspective. Over -- what are the biggest risks the three biggest wrists to the US economy right now. Well I'd say that in no particular order they are shooting war in the Middle East. They collapse of the European banking system. And the what's called the fiscal -- for the tax increases and spending cuts. They're receptive at the US economy in the this year. He used to -- specify. What you're looking at per tax increases here in the United States on January 1. What we've got a whole bunch of different pieces the sequester. Which -- cut government spending which was scheduled to happen. As part of that the debt ceiling deal they struck that so that's a relatively small bit. The bigger it's our big increases in tax rates and not just the that normal income tax rates on regulars to capitol put taxes on capital gains and dividends. And the Alternative Minimum Tax which they seem to fix every year but they haven't fixed yet for next year but. And then there's also some other spending cuts the so called talks -- in Medicare which is. An annual. Pull pool to the voters' lives exercise they do to pretend it. Future health care across certain to rise is gonna pay doctors last. In total if none of those things happen. The impact on the US economy is a reduction in the government deficit. Of about somewhere between three and 5% of GDP in the -- supporting Peter 10% of GDP so what does a great job produced in the deficit. But it's a it's if the economy -- two and a half percent in negative 5% wall. That have been -- And that would mean we're in recession again. Payday that would forecasted if they. If they allow the tax increases to go into effect on January 1 that would mean we're looking at a sizable. Increase in GDP. Carried to incur a likelihood of a recession rather. It's. Assuming that nothing else changes that is correct with that said there's a possibility that people who will put myself in this camp. Look at the deficit and think oh my lord I need to save like crazy because. Medicare -- -- it will go away because -- -- country will be broke yup. People might say -- the deficits under control I don't need to say quite so much I can go out and buy that car and so it might. You know there will be some they'll be some positive effects as as well some negative effects. I noticed that Italy is having difficulty. Issuing bonds and getting people to participate in their bond auction. And -- you alluded to Europe being is one of your three big concerns for the overall economy. How big a problem is -- I mean what how does Europe play out from your perspective how are you managing money as a result of the problems in Europe. The problem the simple source of the problem is and that it is an accent it's the same problem here in the US. The government collected money paid it out benefits ran themselves deep into debt. And as the demographics work through. The governments are -- effectively bankrupt. They think the bond market. Global bond markets. Have decided that they don't wanna -- governments more money because they don't think they're gonna get repaid. So that's why interest rates -- -- -- because nobody wants to buy more of the bonds and so the governments -- a hard time warily. The impact that the government level is so obviously they're gonna need to spend less money. If they if they get less revenue when they can't borrow money so they effectively forced to -- a budget deal. From our point of view the impact on the US economy does not come through that channel. The problem is European banks own lots of lots of your being government bonds in the -- where the US banks swap well what's what's the US government bonds. Would you really want -- -- -- -- I don't think there's a First National Bank about them but if there were First National Bank about that which you feel comfortable putting your money there. Right not at all not at all today so how does it play out over -- what it -- is the eventual resolution that does the Euro dissolved today. I got I've never been able to first the last eighteen months I haven't been able to. Anticipate. What the eventual outcome is in your. The bureau may or may not fail there's there's I would think even within our shop there's a certain amount of divided opinion. But I think that the the place where especially the Europeans and pretty much everybody -- has consensus is governments are gonna have to build a much. And and so the end game is less government spending. May or may not be our taxes. But but clearly balanced budget. And that is the you know which. He's as they do that it does winning your games -- they as they do that the unemployed or it's gonna go even higher and potentially do. That the question to some extent is that in in Italy apparently going to stand at the total tax burden is more than -- 2% of GDP you know. And and so you're gonna -- -- government employees clearly they're gonna become unemployed. But if the private sector feels a little bit less -- to death and that might be some. Economic growth. -- the -- could become more competitive level missiles. You mentioned -- concerned about the Middle East you know in the Middle East has been a problem firm in terms of you know the did did military actions over there and war breaking out for what fifty or sixty years -- me we've been living with problems in the Middle East. What is the likelihood of it Israel. Doing a missile strike or some kind of military action against Iran. I wish I knew. If I knew the answer that question -- get Rich Hill. As I look at -- -- -- if it does happen. What you probably see is five dollar gasoline. And actually US economy. -- that that would that would that would battle -- would be enough to throw us into a recession forget about the taxes right. Exactly and if you look back 1970 radio -- -- 1979 Iranian revolution 1990s Saddam invading Kuwait. When oil prices spiked because of the shooting war in the Middle East you end up with a global recession. Now with all that in mind how are you investing in this environment what it what are you view it what are your money managers do -- over their pioneer has got to be tough environment for them when they. They have these large risks hanging over their head yet they're still need to make money for their shareholders. -- so at the end of the day. We look at where the relative values are. And to some extent we know that relative returns are not really what people want to want capsule returns from. But on a relative basis. Stocks look. Cheap relative to corporate bonds. Corporate bonds looked cheap relative to government bonds. And interest rates are probably likely to rise and so in that structure. Then we would look at that we would say. Probably equities have the least downside risk over the article three to five year time horizon -- that says nothing about this week but portfolios tend to be overweight corporate bonds. You're still getting it'll want to take credit risk -- much more than the default probabilities. And you're still being paid on equities. Are using the high yield market at all to your advantage because I've looked at some of the returns on high yields and my set myself while these companies seem pretty stable. They're high yield so obviously they're not you know is as stable as an investment grade company. But did the returns seem pretty attractive. The returns are attractive and the yields are still very attractive in relative term. You're getting what's called something like 73%. In the high yield bond market. And -- before returning around 2% and so let's assume for the sake of argument that you view something like five or 6% after defaults. That's a whole lot better than government. How when you look at government bonds whether you're talking about treasuries are inflation protected securities I can look to tips yesterday in terms of an ATF and the yield was like one point 4%. The 10 year this morning is that two point 01%. What how is that. Returned at 2% return over the next ten years on a ten year treasury how much less than the rate of true inflation is that. The Fed says that they're targeting 2% inflation and that tipped the tenure tip is right now yielding close to zero. And so the market effectively. Believes. Inflation will be about 2% over the next ten years. And so I would say naive we if you buy a -- for -- bond and you hold to maturity. The purchasing power at the end of ten years will probably be about the same as the purchasing power today. Even with a real inflation when you do when you factor in food and energy. Yes. Not the question of food and energy inflation over the last couple years it's definitely been IPO but -- If we get a couple of good purpose which is to say good weather -- don't know what's note droughts yup. The price of foolish. Shouldn't go higher. And as we look at the energy prices. We don't really feel a lot of upside risk to energy prices over the next three to five years very good -- Sam thank you very much for joining us appreciate your time my -- Alastair -- work well joining us.