MARKETS

The markets will see more bubbles and declines as long as policymakers avoid the real debt issues...but once taken care of, a big bull market could shine through, says Jack Ablin.

Jack, it’s great to have you with us...but we sure are in a tough quandary. All of you folks who are with the large trust companies and the large banks have got to be challenged right now, given the returns that you are getting from typical retirement-oriented investments like bonds, and even dividend-paying stocks with the volatility.

So what have you devised for this? You are not one for hedge funds in many of the accounts are you? What is your view?

No, no, we generally like liquidity. We want to be able to have the agility to change our risk around as the markets change.

Unfortunately, private partnerships and hedge funds don’t give us the flexibility to get our money back right away, so we have generally avoided that area, but you are right. I mean, this is that whole area where we have really lost sleep at night for our clients.

The fact is that policymakers, both monetary and fiscal, are deliberately running a policy where they want to keep inflation higher than interest rates, and for retirees that is really a lower standard of living if left unchecked.

We started worrying about this in 2006. Recognizing that, we built a strategy we call our diversified income strategy in 2007, launched it then, and it is a diversified portfolio of income-producing vehicles, diversified in a way to manage risk and return.

And it has done great. If inflation tends higher, if inflation expectations trend higher, then this will do certainly much better. If nothing happens, we have a higher yield than a bond portfolio. So really, it is only the event of deflation or disinflation will this strategy underperform bonds.

Excellent, excellent. What size accounts would you put that in?

Right now, we require a $1 million minimum, although I think soon we are going to be launching a mutual fund, a B-mode diversified income strategy mutual fund, that we can then accommodate clients of all kinds.

So that could mix in with their other investments.

Right.

What is your five-year outlook for these markets, US and foreign?

Sure. I think we are going to bump along. I think the Fed is going to want to keep their strategy in place for as long as possible, give them their preference to err on the side of too much inflation rather than not enough, or deflation.

Does that cause a bubble?

Yeah, I think there is a decent chance it causes a bubble. My concern is, and I don’t know if it is three years, four years, or five years, but eventually, we are going to have a problem. Either some exogenous event like we endured in the 1970s through the oil embargo or some just sort of a market backlash where we will eventually run out of short-term options.

We will no longer be able to use quantitative easing and deficit spending to solve our near-term issue. At that point, I think we are going to face a challenge. It will push policymakers of both stripes into a mode of having to look back at the long-term and fix, finally address, our long-term imbalances. Once we do, I think that will ultimately set the stage for a multi-year bull market.

Between now and then, I think—especially as we face those challenges—it is going to be kind of rough. And I do think there is probably one more leg down in this cycle. But once the chips fall and the dust settles, like I said, I think we could be in store for a multi-year, 15- to 20-year bull market.

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