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CLOSEST THING TO AN ECONOMIC CRYSTAL BALL
What’s in store for the economy and business environment in the year ahead?
I spoke with financial broadcast news pioneer RON INSANA, senior analyst and commentator for CNBC, this week and unpacked his thoughts.
Ron did his first keynote speech last week to a group of business leaders on Long Island. We talked about the mood in the room and the top concerns on the minds of those attendees.
Speaking of top concerns, the Bank of America Securities' latest global fund manager survey revealed that asset managers now say November's election is the top market risk. Now that Phase I of the China trade agreement is in place, that issue has taken a back seat to political uncertainty. It’s always something.
I hope you enjoy you find Ron Insana’s comments here valuable.
THE DN CONVERSATION
USEFUL LINKS
THE TRANSCRIPT
Tony:
We're with Ron Insana from CNBC. Ron, welcome and let's have a conversation about what's going on with the economy.
Ron Insana:
Thanks, Tony - I'd love to.
Tony:
You did your first speech of 2020 last week out on Long Island. What was the mood of the audience?
Ron Insana:
Well it was actually reasonably upbeat. You know, the folks that we spoke to who were a community of Long Island business leaders had some of their own internal data that they'd provided. They'd done surveys about the Long Island economy and how it compares with that of the rest of the nation, and CEO confidence on Long Island was down a little bit, in line with maybe some of the disturbances we've seen globally over the last several months, including all that proceeded some of the Iran issues that we've had recently. They were a little concerned about the case of global and domestic economic growth, although they were relatively upbeat about their own economy.
So I think it's kind of like the rest of the country insofar as people are comfortable with the notion of the US economy as growing, they're comfortable regionally that things are improving, but they have a set of concerns around politics, around geopolitics, and to a certain extent around what had been, at least up until the time that they engaged in a survey, of the ongoing trade war in particular between the United States and China, some of which has been resolved, but not all of it. So they're waiting to see how that plays out over time.
Tony:
In terms of the election economics, what are they talking about, particularly after the talk was over and they surround you to have a conversation about things they might not have been willing to say in front of the whole group?
Ron Insana:
Well, you know, I think everybody understands it to a certain extent, it's going to be almost a binary choice come November of 2020, particularly if there's a progressive candidate on the Democratic side, whether it's Elizabeth Warren or Bernie Sanders. You know, Joe Biden I think elicits the most confidence that not so much would change in a radical fashion, but if you did have Elizabeth Warren or Bernie Sanders at the top of the ticket, I think people are concerned that the relatively low tax environment, which we find ourselves today, mostly for corporations, less so for individuals, would be not only reversed, but then would be radically altered in so far as both Elizabeth Warren and Bernie Sanders are looking at wealth taxes.
They're looking at incredible amounts of increased spending, and they're looking for all manner of tax increases to finance that, whether it's not just the wealth tax, but higher income taxes on corporations and transaction taxes on financial activity. All of that would probably make some people a little bit nervous that the economic recovery we've enjoyed now for a full 10 years would likely stop in its tracks because it would be a pretty tax burden to finance what some say would be 30 to $60 trillion in additional spending, depending on who the standard bearer would be.
I think they're much more comfortable with the notion of a Joe Biden. Some are quite comfortable with leaving Donald Trump in place because it's been very beneficial to corporate bottom lines, even if it hasn't, with respect to the tax cuts, lived up to its promises for workers, for capital spending and for employment and things like that.
Tony:
And, of course, you're talking about an audience on Long Island, so it's got to be a vastly different set of circumstances and concerns compared to perhaps someplace in Illinois, Wisconsin, Michigan, where you're looking at maybe a more manufacturing base. I gather there's probably not the same kind of manufacturing and certainly not agricultural angle in the audience that you just addressed last week.
Ron Insana:
Right? I mean, aside from Long Island wine production, it's not really the ag community, but it is a big tech community. And so, with respect to international trade, they have their concerns about what was going on between the United States and China. And with respect to the phase one deal that was recently struck, I'm not sure that necessarily they're convinced that we're over the hump with respect to China. Certainly they've talked within the phase one accord about intellectual property protection, which is very important to technology companies. They talked about a forced technology transfer, but we're not sure that the enforcement mechanisms are yet strong enough to protect IP that's coming from the US on the technology side. So that's probably still an open concern, even though between the time I spoke to them and today, you know, the phase one deal was struck.
So I think that's an open concern. Yeah, I mean look, Long Island is, to a certain extent, tethered to Manhattan - even if they might deny that, there's still a lot of areas in and around New York City that are bound to it. So if you were in a Michigan or you were in a Wisconsin or a Pennsylvania, or an Iowa for that matter, a whole different set of concerns around farming. The promise of additional agricultural purchases by China probably exceed the reality because China would have a difficult time importing as much in the way of new agricultural products as is promised in the deal.
So I think even the jury is out there. If I were to go to Michigan or Illinois or Iowa, or any of those states that are heavily dependent on agriculture, they may have a wait and see attitude. That's my own surmise of course, but I think as much as they're heartened that this is getting out of the way, they may not be certain it's going to be quite as strong as anticipated.
What's ahead for the economy and
the environment for business?
Invite RON INSANA of CNBC to speak at your next event.
Tony:
And I've read, it may be saber-rattling for all I know, about the potential to start a separate internet based on a different set of standards that China companies happen to be embracing. Do you think that's just more rhetoric to try and bring some kind of a deal to some fruition?
Ron Insana:
I'm not sure about that. I mean, you know, China's going off on its own in a wide variety of new and important technologies, whether it's 5G and trying to be dominant there, whether it's surveillance types of technologies in which they certainly plan to create something of an Orwellian state with the amount of surveillance and social scores that are being given to individuals that will determine how they fare within Chinese society. Some of these things, they may not be saber-rattling at all. They are planning an entirely different system which would be competitive and not cooperative with our own.
We could see a real East-West split when it comes to technology and technology implementation. We may see it over electrical vehicle production as well. There are a host of areas in which China hopes to be dominant. I suspect that it is not a productivity enhancing environment. If they're going to create their own internet, which would likely be a closed system and exclude a lot of information from the outside world, I don't see how that enhances their productivity. It certainly keeps greater control on their people, particularly when you look at this, these social scores and facial recognition technology that allows for intense surveillance, that is not a productivity enhancing move.
And so, I think to a certain extent, in the longer run, as much as people fear China's dominance in this regard, they may be overestimating just how helpful this is going to be to China in the long run. And in fact, it might be very hurtful to their economy over the next several years.
Tony:
Well it's going to be very interesting. And speaking in the long run, the long run bull market everybody's been talking the past couple of years, has it run out of steam? Is the end imminent?
Ron Insana:
Well, let me give you two hackneyed quotes. Number one from John Maynard Keynes who says, “In the long run, we're all dead.” And the other, “Bull markets do not die of old age, they simply are usually exploded by the Federal Reserve, which would be raising interest rates, or an external shock like an oil shock that we had in the 70s.”
Maybe not quite as relevant today, or some event that could cause problems in the stock market, like an incredible global slowdown that really drags the U.S. economy with it.
So right now, we are probably, and I hate to get in the weeds on this, but technically overbought. The market's gone so far so fast that it's probably due for a 5 or 10% correction to say the least. But it's hard to say that the bull market's over unless or until the economy slows down, profits disappoint notably in 2020, the Fed raises interest rates, or there's some sort of military altercation between United States and some adversary like Iran.
That creates an enormous amount of unrest. And you know, we're less sensitive to oil price increases. And we've seen this now twice in the last several months where the exchanges with Iran pushed oil up and then it fell right back down because we're producing, we're close to producing 13 million barrels of oil a day and almost entirely self-reliant.
And it's certainly not reliance on Middle Eastern oil. Or, when the Saudi Arabian oil facilities were blown up a few months ago by presumably Iran, we had a spike in oil prices and they came right back down. So there's plenty of oil. So the type of shots that we saw in the 70s are not likely today, but still, the onset or worry about war, at least historically, can create bear markets and stocks. And so, those are the two things, higher interest rates and wars that you really have to worry about when it comes to a bear market or a recession. And none of those things seem imminent on the horizon.
Tony:
So the big question is, before we close here, if you've got new money and want to invest it, what would you tell anybody who happens to be watching?
Ron Insana:
Well, time horizon is always key. So you know, if you're 20, 30 years away from retirement and you're either a Millennial or you're a GenXer, you've got enough time that you really don't have to worry about markets fluctuations. And so, you begin with a disciplined approach to put money into, let's say, an S&P 500 fund that doesn't charge you anything. You buy some certain types of fixed income products that give you a little ballast in your portfolio, and you pay attention.
And if there are companies that you know very well and you're very comfortable with their outlook, and you're comfortable paying attention, doing homework on individual companies, you might want to allocate some money there.
The one thing I've been stressing now for over a year is that quality here wins. Big companies, clean balance sheets, clear pathways to profitability and revenue growth will be key going forward. Because the market is relatively rich, and just by historic standards, we've seen four companies now top a trillion-dollar market valuation, something we've not seen for a while. Five companies account for 18% of the S&P 500's market value, something we've not seen since 1999 when the market topped out before the internet bubble burst.
So you have to be very comfortable that the individual stocks that you own, or even some of the, let's say, fixed income or bond mutual funds that you own, are very, very high quality and don't have anything sketchy buried in there. So you do have to do a little homework. If you own a bond fund and it's filled with levered loans and other types of exotic instruments, you want to steer clear of those right now, because this late in the cycle, even if there's not a recession imminent, we'll probably see some defaults go up in the corporate sector, and you don't want to find out after the fact that your fixed income mutual fund just blew up because it had a lot of junk in there that pushed the yield higher.
So I would lean towards quality no matter what the asset class is, whether it's stocks, whether it's bonds, and I would stick with a disciplined approach to investing because it's really key if you have a long time horizon, not to break. You don't get worried about 5 or 10% corrections. And if we're on the cusp of something big like 2008, which I don't believe we currently are -
Tony:
Right.
Ron Insana:
But if we are, there is a time where you take money out of the markets, but I don't see at the moment any of the same bells ringing that preceded that type of decline. So you know, even if we have a garden variety recession or a garden variety bear market, I don't think the warning shots are here at home. If we do see shots, they're probably going to come from overseas, and we may have enough time to issue a warning about how to readjust your portfolio if and when that moment comes.
SUPPLEMENTAL READING: ECONOMIC REALITY CHECK -
A SNAPSHOT OF THE FUTURE,
DECISION 2020 - AN ECONOMIC CROSSROADS and
SMART MONEY MOVES -WHAT TO DO NEXT
Tony:
Great, Ron - always great insights. These are the kinds of insights that you bring to audiences when you speak. The economy is going to remain a very, very hot topic at events all over. And because, of course, being an election year, so much rides on it in terms of economic policy and where we're going to be going, and that impact on not only the business environment, but also the investment environment. So thanks for your time, taking a few moments to go over this, and we'll look forward to a great 2020 together.
Ron Insana:
Same here. Thanks Tony.
