This past Friday I spent some time on the phone interviewing Jason Trennert, the Chief Investment Officer at one of our investment strategy services, Strategas Research Partners. I had about ten questions to throw at Jason, the same questions I’ll pose to some other investment heavies. I think you’ll enjoy reading this, as Jason takes a unique look at the various markets, drawing on history, economics, and finance to form strategies and opinions. I believe that, like me, you’ll find that Jason’s views form a narrative of sorts that’s internally consistent and persuasive.
I’ve pasted in a little bit about the firm from its website, and below that is the interview. You can find the firm’s website here.
Strategas Research Partners is a leading institutional broker-dealer focused on investment and sector strategy, macro-economics, policy research, and technical analysis. The firm seeks to provide timely and insightful research on the global equity and debt markets to institutional investors around the world.
Founded in 2006 by Jason Trennert, Nicholas Bohnsack and Don Rissmiller, Strategas is an independent, private partnership committed to providing superior research and client service in the old Wall Street tradition. Its motto, bonitas, probitas, fides – class, integrity, faith – guides both the management of the Firm and its commitment to its clients, its associates, and its vendors.
The Firm employs 30 research analysts, institutional salesmen, and sales traders, at its offices in New York, Washington DC and Geneva, and is fortunate to count among its clients some of the world’s largest mutual funds, investment advisors, pensions and endowments, and hedge funds.
1. How do you view the markets?
The best way to describe myself is by saying that I’m basically a top-down investor, so I start with both the business cycle and the credit cycle to make a determination of how aggressive I want to be in equities. And, in addition to that, I’m a monetarist, so I believe that money growth has a lot do with the level of financial assets. Those are the two things I’m starting with to determine which sectors and how aggressive I want to be in terms of my exposure to equities.
2. How would you describe your outlook for 2010?
The phrase we’ve been using–and we’re sticking with it for now–is bullish until the bill comes due, and we’ve had that view for a little less than a year. It’s worked well until relatively recently because now there are questions as to whether the bill is coming due right now.
The two most important pieces of the bill are higher taxes and higher interest rates.
One of the ironies of what’s happening in Europe is that it probably delays both of those bills. It takes long-term interest rates down here in the States, strengthens the dollar, and makes it less important for the Fed to tighten meaningfully any time soon. At the margin it tends to benefit U.S. equities.
When you refer to the bill, is that the bill for the largess of the U.S. and other countries for bailouts and the like?
Exactly. It’s the bill for the massive infusion of fiscal and monetary stimulus that we’ve used to forestall deflation.
The good news is that it looks like–until very recently– we’ve done a pretty good job of doing that. The bad news is that we’ve got to pay for it. You’re going to have to pay for it by higher interest rates to attract foreign capital or you’re going to have to raise taxes to put a dent in the deficit.
3. What is your biggest worry for the short term?
I would say it’s more of a policy error and it clearly now has to be a policy error in Europe. The policy error to me is that the Euro just blows apart, and that would be so deflationary in the short term that it would probably take asset prices down in the U.S. and bring in the possibility of additional deflation.
I don’t see that as likely, though, mainly because I don’t see how that’s in anyone’s best interest. The Euro breaking up would be the financial equivalent of World War I in a weird way–it’s one of those irrational things that no one thought it could happen, yet for a variety of cultural and nationalistic reasons it happened anyway.
So, how would you handicap the odds of the Euro currency going to parity [with the dollar]?
The odds of the Euro going to parity or losing a lot of value are very high–like 100%.
[GPS - Given the high odds Jason assigns to this happening and the low odds of the Euro “blowing apart,” Jason’s clearly worried about something much worse than just a 20% slide in the Euro.]
4. How about a long-term worry?
The longer-term fear I have for the U.S., specifically, is simply the size of the deficit and the debt. What worries me more about that is not only the level we’re at now; it’s also the fact that there hasn’t been much evidence to suggest that anyone has any interest in being serious about deficit reduction—there’s no political will to cut spending. Again, that’s going to mean higher taxes or higher long-term interest rates, or, potentially, much higher inflation.
5. Alright, so how about a bullish factor for the short term?
The most bullish factor is that there are enough cyclical drivers in place that are likely to lift economic growth, and those would be the following.
First, there’s a fair amount of delayed fiscal stimulus that was passed last year; so only one-third of the spending part of that has been used. There’s also a fair amount of pent-up demand for cap-ex [capital spending by companies] so that’s also going to lift economic growth. Second, I also think that for the longer-term perspective—especially for large-cap stocks—I think the most interesting thing—the biggest positive is valuations. Stocks aren’t trading at multiples that are so high that earnings can’t surprise people on the upside. Put it another way: there’s a fair margin of safety in equities, especially relative to Treasuries, and that makes me somewhat optimistic.
6. What about the longer term, what’s the most positive thing to consider there . . . anything?
The most positive thing is that we might somehow grow so quickly that we—that the overall issuance [of government debt] is going to come down some. That’s a positive, but it’s very difficult to get a whole lot more bullish than that.
The other thing you could say –the other hopeful sign–is that the electorate will get involved and demand changes from elected officials. That is the hopeful thing. We have a very dynamic political system here, and, generally speaking, you don’t drive right off the cliff; things change. Our political system is designed to change.
7. What’s your guess as to the best-performing asset class over the next several years?
I think it’s large-cap growth equities in the U.S., and that’s mainly because I think that, first, the valuations are very positive. Secondly, they should be able to take advantage of global growth because of the strength of their global brands. It’s not just what’s going to happen in the U.S.—but the growth in China, the growth in India, the growth in the emerging world. You’re not spending a lot—take a company like Apple; the stock’s trading for 19.5x next-year’s earnings—or even Microsoft, which is trading at 14x earnings. These are not untoward multiples.
Large-cap growth equities is a longer-term guess. In the shorter term, I also like gold, and I still think there’s plenty of room in it.
What’s a single bullet point to support your gold position?
It’s a lack of faith in fiat currencies and a debasement of currencies. One of the things that is interesting is the idea of—the U.S. has an enormous advantage in that its currency is a major reserve currency—if it didn’t have that status it would be having many of the same problems as the rest of these currencies. The problem about that is that [as a reserve currency] you lose some of the market signals that could be longer-term beneficial for you—short term painful, but longer term beneficial—because at least Europe now has to face up to its problems right now. In the U.S. we can so easily fund the debt because we’re a reserve currency, and because of that we have a tendency to compound the problem.
#8. What’s a favorite sector for right now?
Technology satisfies so many of the things that I like. One is that there’s been a pent-up demand for cap-ex. Tech is a very attractive way for companies who want to increase cap-ex to do so. It’s relatively cheap and can result in productivity gains. The second part is that the balance sheets are such that they’re not dependent on the credit markets really at all—they’re loaded with cash and that gives them great flexibility to either pick up other companies or to pay special dividends, or to buy back stock.
#9. How would you characterize the outlook for commodities?
Generally speaking, if one’s bearish on paper currencies, one should be bullish on hard assets, especially hard assets that China needs and wants, which is pretty much all of them. It seems to me that China is, essentially, the marginal buyer of commodities, and I don’t see that they need to slam on the breaks [to slow down its economy.]
#10. Are there any regions that seem especially attractive now?
Emerging Asia has to be where one has to be excited and it’s mainly because of the size of the populations and the stage of development—or lack of development—they’re in right now. There’re just clearly a lot of opportunities there now.
#11. Do investors need to have exposure to alternative assets—lesser correlated assets?
I don’t have a strong view because I think you can get some of that exposure through equity-type products without pioneering. I do think that commodities, or commodity-related equities should be a bigger part of the asset allocation then it would have been in much of the ‘80s and ‘90s.
#12. Is buy-and-hold a viable strategy or has its time passed?
I’m not particularly fond of that idea right now. The reason why I’m not is that I generally think that the economic cycles are going to be shorter because you don’t have endogenous cyclical forces—let’s say pent-up demand for consumer durables—that are driving the cycles—that mainly the cycles are being driven by government spending, which, again, requires you, eventually, to pay for it. You want to be long equities when there is fiscal accommodation and you want to get more defensive when there’s fiscal contraction.
Does that include monetary policy?
Absolutely, but I’m more worried about fiscal contraction than I am about monetary contraction, but I very much subscribe to the view that monetary policy, at the margin, is more important, but I’m not convinced that the Fed is going to have to slam on the brakes any time soon, so I’m not particularly worried about monetary policy over the next year or so.