The Global Risk Nexus:Economics, Politics, Policy & Markets
Jay Pelosky, Founder Pelosky Global Strategies
www.pelosky.com
MSCI Institutional Investor Conference
NOVEMBER 1st, 2016
ECONOMICS
Global Growth Deceleration
Potential Growth Rates
US & EU Natural Rates of Interest = 0% (Real Rate that Balances Monetary Policy so it is Neither Accomodative nor Contractionary)
1990s 2016
US 3.3% 1.75%
DM 2.25% 1.16%
EM 7% 5%
Key Growth Inhibitors
Poor Demographics In Both Developed & Emerging Economies - Getting Old Fast
Declining Labor Productivity - US in Biggest Slump Since the 1970s. World Productivity has Collapsed from 1.8% to 0.5% pa.
50% + of Global GDP Yet No Global Locomotive
Emerging Economies
Terms of Trade down 20%, Sov. Debt Downgrades at Record
Domestic Demand Growth Capped by Income/Debt Levels
Getting Old Before Getting Rich
Low Growth World is Here to Stay Over Foreseeable Future (3-5 yrs.)
Key Economic Takeaways
Declines in Potential Growth Rates & Natural Rates of Interest are GLOBAL
Drivers are Powerful, Long Term Factors that are Unlikely to Reverse Quickly
POLITICS
US, Europe (Germany, France, Netherlands) + China/India/Iran = over 50% Global GDP
2016-17 Global Electoral Cycle
As Political Risk Rises, Investor Risk Appetite Declines
Trump a Symptom not a Cause – Divided Govt. Post Nov 9th
Weak Global Economy Leads to Rise of Inequality, Populism &
Authoritarianism
Politics in a “Post Truth” World
Loss of Faith in Elite Competence & Sense of Fairness
Corporate Earnings At Risk
What Replaces Globalization?
Finance, Tip of Globalization Spear, Broken Post GFC
Key to Avoid 1930s Style Rollback
A Big Data World needs Data
Referendums Dangerous
Brexit, Colombia Peace Vote, Italy…
No history = no data = no idea
Inability to Model Hamstrings Active Manager Community
POLICY
Monetary Policy Alone Leads to Limited Economic Growth
From QE to ZIRP to NIRP to Nowhere
Risk Loss of Faith In CBs and Major Stock Market Decline
Will Monetary Policy be able to Alleviate Recession (FFR at Start of Past Recessions over 5%, not 0.5%)?
From Opportunities for Capital to Opportunities for Labor
Austerity Economics
Policy Stagnation > Growth Stagnation > Stagnant Financial Returns
Shift From Austerity Economics to Investment Economics
Will Transition Blow Rates Up & Send Stocks Down?
Tricky Transition
From Pure Monetary to Joint Fiscal & Monetary…in the US, UK, Europe, Japan.
End of Deflation, Beginning of Inflation?
Short Policy Window to Boost Middle Class Jobs
Lurking in the Wings
AI and the End of Working Man
Automation Could Eliminate 50% of Jobs in Next 15 Years
MARKETS
US Public Pension Fund Target Return = 7.5%
THE LOW RETURN WORLD
Last 20 Years = 7.2%Last 10 Years = 5.8%Last 1 Year = 0.3%
US Public Pension Fund Actual Returns
What Happens to Returns when the Next Recession or Bear Market Hits One
or Both Asset Classes?
THE LOW RETURN WORLD
US Economy in 7th Year of Economic Expansion
US Stocks and Bonds Close to All Time Highs in Price & Valuation
Or Both?
Where IS the RIsk?
Is the Risk in SPY @ 2200?
Or the 10 yr. UST @ 1.75%?
OUTLOOK
Don’t Bemoan Globalization’s End – Celebrate Regional Deepening
Economics
Asia, Europe & the Americas Each Benefits from Three New & Mutually
Reinforcing Growth Factors that Provide the Ability to:
Tri Polar World Global Growth Model
Through the Rise of Urbanization, the Service Sector
Economy and Ecommerce
SELF FINANCE
SELF PRODUCE
SELF CONSUME
Through Growing Wealth Pools
Through the Rise of Advanced Manufacturing, Mass
Customization, 3 D Printing etc.
Rebuild Confidence in Global Economy; Focus on Better Outcomes
for Labor; Replace Austerity With Investment
Politics
It’s All About the Response… the Response to the Rise of Populism &
Authoritarianism. Can the West’s Political System Self-Correct?
Ladies Choice: Hillary Clinton, Theresa May, Angela Merkel, etc.
Saudi Arabia’s Ability to Weather Its Oil Related Budget Shortfall
Policy: 3 Challenges
Developed Economies’ Transition Away From Pure Monetary Policy
China’s Ability to Manage Its Debt Load While Pres. Xi Seeks 2nd Term
The Rise of the Millennial/Robo Combo
Continuation of the Low Growth, Low Return World
Sustained Focus on Fees & Performance
Pension Fund Revolution
MarketsFour Drivers to the (Passive) Future
LOSERS
Active Managers
Legacy Buy & Sell Side
Hedge Funds/Liquid Alternative Strategies
Research Analysts
WINNERS
Passive/Smart Beta
Robo Advisory
ETF Strategist/Model Portfolio
Asset Allocation Specialists
Markets
Pension Fund 7 Step Guide to Survive & Thrive:
Markets
Spend Political Capital to Get Return Targets Lowered – the Sooner the Better. 7-8% Targets are Unrealistic… Think 3-4%.
Invest in Human Capital, Build Internal Asset Management Capability, Develop Cross Asset Expertise.
1.
Cut Costs. Public Market Beta Exposure, Stocks and Bonds, Should be in Passive, Min Vol Products.
2.
3.
Pension Fund 7 Step Guide to Survive & Thrive:
Markets
Prepare for Greater Competition – the Emerging Economies are about to Globalize Their Pensions.
Develop Partnerships & Co Investment Strategies Both Domestic and Offshore.
4.
Use Partnerships to Develop Regional Footprints & Gain Access to Best Local Opportunities.
5.
6.
Think about Structure – Pressures to Consolidate and Achieve Scale Back and Front Office are Only Going to Grow.
7.
The Global Risk Nexus:Economics, Politics, Policy & Markets
Jay Pelosky, Founder Pelosky Global Strategies
www.pelosky.com
MSCI Institutional Investor Conference
NOVEMBER 1st, 2016