Okay that’s corporations. What about people?
TRAHAN: We have 19 million empty homes in the United States. Want to fill them? Liberalize immigration. There are close to 10 million people with Permanent Resident (green) cards in the U.S. and close to that many with work permits. But the path to citizenship can be difficult. It took inc many years of paperwork. And until I became a citizen, I never would’ve considered buying a house in this country because I always felt that my status was transient. So we need to make things easier for people.
Canada in the 1990s actually did something like this. The government wanted to capitalize on the angst in Hong Kong as it was about to transfer back to China, and so created these accelerated paths to citizenship. You committed to buying a house in cash, for instance, and you were in. It helped Vancouver become a boomtown.
How do we transition from deflation to reflation?
TRAHAN: That’s going to be interesting. There are very few investors today who have actually invested in a deflationary environment. That’s because the last time we had one was 1954. Now, we get to reflation via economic activity. But the scary thing right now is that almost every element of the consumer price index, or CPI, is decelerating. Indeed, we think it will remain negative for much of this year.
The way the CPI is designed in the U.S., rent inflation makes up 30% of it. Now, as I mentioned earlier, there are 19 million empty homes — and many are being recycled onto the rental market It’s the same with condos. And until we absorb all of that it’s 30% of the CPI that keeps trickling lower The other big driver of CPI is wages, which, believe it or not have not yet fully adjusted to reflect the grave economic conditions. Wages typically move inversely to the unemployment rate, and that’s seen a sharp increase in the past few quarters. Basically, we think wages are about to crater. So those two influences, rent and wages, are really challenging.
You mentioned earlier that we may well see a broad-based improvement in stocks toward the end of the year. Where should we look today for opportunities?
TRAHAN: Historically, it’s higher beta stocks — those with above-market risk — that tend to do well coming out of a downturn. And right now, by most accounts, that’s technology. If you’d told me at the beginning of the year that tech would now be the top sector, I wouldn’t have believed you. But there’s a lot of investor angst right now about companies with unfunded pension liabilities, low cash holdings and high debt. Tech stocks are not normally defensive. But the same characteristics they’ve almost always had — low debt, high cash and few companies that pay pensions — have made them defensive in this environment. Tech’s cheap relative to the S&P right now. It’s just the right compromise between offense and defense. I wouldn’t say that in any other year than 2009.
Among small, mid and large, the Mid Cap Index so far this year is what’s doing best And part of that is because it has more tech stocks than some other sectors. I’d also go with value over growth. As for the traditional defensive stocks, as things stand now, they have elements that are making investors wary: healthcare has regulatory risk; utilities have debt; staples have valuation risk.
TRAHAN: Longer term, I find a lot of the emerging markets to be interesting, and this is from someone who has been dber negative on them. I really like Southeast Asia. But we’re talking 2010, not the next three weeks. And not everywhere. But there will be pockets of it that will be worthwhile. Right now, many of those countries are seeing their economies tank because they all have export-based models. They’re leveraged to the U.S. consumer, to China, to Europe.
As for Europe, those countries are behind the U.S. in terms of recovery. ‘While our Fed has been cutting rates for some time, their central banks only started in October and didn’t get religion until early this year That’s when the U.K., the European Central Bank and others cut rates basically to zero. But it takes time, about 18 months, for these moves to take effect. On top of that, I’m worried about places like Russia, countries that are heavily dependent on oil revenues, As oil prices have tumbled, their budgets have just all of a sudden melted, evaporated.
But I think that eventually it will be a very bullish backdrop for stocks because an
easing cycle will take place on a global scale. It will be a synchronized economic recovery
— though probably not until 2010.
François Trahan, thanks so much for your professional insight and your personal
revelations. We look forward to talking with you again soon.
By Ian Prior, U.S Trust
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22 Spring2009 CAPITAL ACUMEN Other Bank of America Investment strategies have advocated massive global expansion of the world economy. That's how the banks and government's avoid being lynched by expanding the Ponzi scheme until it ends up in war or massive government subsidies. While there are many people who think the government wants to give us money to help us out of the kindness of the heart of the politicians the fact is if they didn't give the banks a monopoly to use our assets as theirs and charge us interest for the privilege they would avoid debt and public expenditures like the swine flu. The banks get mega rich financing the debt caused by public expenditures and allows the multinational corporations to strip the assets of the people and businesses outside the monopoly.