Every year I get together with an old friend of mine. Notable among the past events he was early to observe are the rise and fall of Japan, the opportunities in China after the death of Mao, the end of the command economy in Russia and the unrealistic valuations of technology at the end of the last century. We most recently caught up last month over the phone.
“The whole world is suffering from too much debt. As a result, growth almost everywhere is going to be slow. I know you believe the problem is insufficient demand, but the major industrialised countries already have considerable debt and do not want to add any more to it to stimulate the consumer. Japan is an exception. They already have the highest debt to Gross Domestic Product (GDP) of any major country and they are willing to add more. China is an exception on the other side. They are in a position to take on more debt because their debt to GDP ratio is low. Without more fiscal stimulus, demand will be tepid and growth will be disappointing. This is the state of the world now, and it is likely to endure for some time. In the near term, I don’t see a calamity, just sluggish economies and many equity markets not doing much.
“It is not easy to make money these days. In the past, if you had the right asset allocation, you could do well for institutional investors. Now most asset classes are fully valued. The bond market is expensive, equities are not cheap anywhere, gold is dead; other commodities are in bear markets, the emerging markets are generally not attractive, China is dangerous, and Europe and Japan are reasonably fully priced. As I said last year, the only way to make serious money is by carefully investing in innovation, by picking stocks in technology and biotechnology, and I would emphasise the latter.
“Most people still don’t recognise the gigantic implications of this phenomenon. Major breakthroughs are going to be taking place in cancer, heart disease, Alzheimer’s, diabetes, multiple sclerosis and other diseases. Picking the right companies can produce impressive returns in a difficult overall market environment. What’s more, the pace of innovation is quickening. The rewards for proper asset allocation will be very modest. I like Facebook; Salesforce.com; biotech ETFs; an industrial company, CS Industries; Visa; Apple, of course; Alibaba; and Palo Alto Networks. I am out of Google.
“There is a question of the impact technology is having on the middle class. Millions of jobs have been eliminated through robotics and other forms of technology. The technical skills required to get and hold a good job are increasing all the time. Service jobs are growing, but manufacturing jobs are rising more slowly, and service jobs generally are lower-paying. Many kids completing college cannot find jobs in their chosen field and are forced to work at something temporary to pay the bills and student loan debts.
“In addition there is the problem of wasting time. According to recent studies, the average college student only spends one hour a night studying alone, perhaps because of other distractions. These numbers could signal problems for American competitiveness going forward, so there is a downside to what is happening in technology.
“Looking around the world, trouble is everywhere. In Greece, a solution has been found, but in the long term, I am not optimistic about Greece staying in the Union.
“In Iran, I’m on the side of thinking an imperfect deal is better than no deal at all. The deal will likely lead to a flood of investment into the country, and that should prove to be very profitable.
“Japan is all right for now, as a result of monetary and fiscal stimulus, but I don’t see any signs that it can grow without a continuation of these policies. Regarding those commodity-based emerging markets that I know something about, I expect continued slow growth. In the UK the debt burden will diminish the possibility of more than modest economic improvement. I expect growth in France to pick up next year because of the election. Last year I was worried about the political balance in Europe shifting to the far right, but I am less concerned about that now.
“Looking at other financial markets around the globe, Modi is making constructive progress in India, but it is slow because of the bureaucracy there. China is working hard to rebalance the economy in favour of the consumer and away from infrastructure and investment in state-owned enterprises, but it is a long and difficult process. They will probably reach their target of 6½% to 7% growth, but they will have to increase their debt to reach that objective. Happily, their balance sheet is in a position to permit that.
“I think we have seen the low point for the price of oil. I know inventories are huge and shale producers are back on stream, but I think $55-$65 is the bottom for Brent. The Saudis are shipping a million barrels a day above their stated quota in order to keep the shale producers in check, but demand is increasing slowly and prices will continue to rise modestly.
“Looking at other non-financial assets, I think residential real estate prices will hold up in places where finance and technology are doing well, like New York, London, Boston and San Francisco. You also see an enormous amount of capital migrating from Asia to areas they believe are safe refuges for foreign wealth. That is likely to continue, but the anticorruption campaign going on in China may slow that process down. In commercial real estate, the real opportunities are in the distressed areas like Spain and Italy.
“Regarding some other issues, I believe the Federal Reserve will tighten in September, but the increase will be small and they won’t raise rates at every meeting. I expect longer-term rates to rise but stay low by historical standards. Everyone is looking for a big correction in the US equity market, but while it looks somewhat expensive to me, so much money in the world wants to have a position in American stocks that I don’t think the indexes will decline much. The vigorous merger and acquisition activity will continue, and I think that will help the markets.
There have been times in the past when my friend has seen abundant opportunities everywhere. Right now he has concentrated his interest on technology and biotechnology. Across the world he sees economic growth restrained by debt, and he doesn’t believe much can be done about that. But while there may be more risks than opportunities out there, he continues to believe you can always find ways to increase your net worth.
Byron Wien is the vice-chairman of Blackstone Advisory Partners LP.
By Byron Wien
