Infovest21 Investor Focus

Funds of funds discuss current environment, Europe and US
At Infovest21′s investor seminar last week, investors and funds of funds discussed the current volatile environment and ways to survive. Discussion focused on how the current environment differs from 2008, issues facing Europe and the US, and the outlook.

2011 versus 2008
Susan Webb, founder and chief investment officer of Appomattox Advisory, observes a couple of major differences between now and 2008. “First, we’re starting from a lower base of capacity utilization and chances are we will not return to that level. Utilization in the US dropped by 50%. The US has recovered about half of that. We will probably only slowly recover the remainder over the next six years. Second, even though banks haven’t fully restructured, they are in much better shape now than they were in 2008. They can potentially start lending. Credit hasn’t been extended to smaller companies until this last quarter. We will just begin to see the rollover of some of the high yield debt next year.”

Webb believes US pension plans will have to lower their expected returns as its going to be a difficult 10 years. “This realization is currently understood by most plans,” she says.

Rob Picard of Boxtree Capital, a consulting firm, points to another difference between now and 2008. There was a lot of leverage in the system in in 2008. Corporate and consumer is much less leveraged now. The government threw a lot of money in the economy and now corporate America is sitting on a lot of cash. This cash needs to circulate which would be stimulative.

Similarities/differences between US and Europe
The big issue in the US and Europe is growth, says Webb. Leverage has funded growth over the past several years but will not be available in the future to do so. “In Europe, the debt is due more to the large pension obligations and misallocated investments. Some managers are calling for a depression in southern Europe. In northern European, like in the US, we are expecting slow growth of about 1.5%-2%,” she says.

Webb points out that Europeans save 15% compared with 5% in the US. While the US has significantly improved its saving rate and reduced each debt burden, individuals still have significant debt overhang. Hopefully, the changes in savings rate will remain at elevated levels.

Picard is negative on Europe. Because the European Union is so different structurally from the US Federal Reserve System, he thinks this will bode well for the US. “The money will flow from Europe to the US. There will be a huge arbitrage from the US perspective. It is hard to get the timing right. How do you make money and survive in that time?”

Webb sees many investors pulling their deposits out of the French banks. France may have to nationalize their banks in order to support Italy and maintain the EU. She predicts that the euro could breakup in two years if a mechanism for orderly exiting of countries is not put in place.

Going forward
Webb adds if they don’t write Greek debt down 10 to 20 cents on the dollar and allow the Greeks to remain within the EU, there will be a massive depression in Greece similar to what happened in the US in the 1930s. “The Greeks, at this current moment in time, cannot support the debt burden by reduction in spending alone. They need a euro bond structure where each country has a certain percentage depending on their GDP and fiscal responsiveness. That will necessitate a political alliance which they still don’t have and a governing and monitoring group to represent the EU,” she says. Picard’s view is that once there is a clog in the system, it takes a while for the whole system to clean itself out. “We are on the road to recovery. There is a lot of frustration in Washington DC, Wall Street and Main Street. The three groups need to agree and clarify the regulations. Once corporate America understands where we’re going regarding regulation, we will see money come back in.”

Picard thinks they’ll get it right shortly. He sees a number of positive factors on the horizon. “The European countries may come to a consensus. It doesn’t happen overnight – it takes time. Washington might start to work together over the next 12 months. And there are some exciting things going on the economy such as developments in technology, pharmaceuticals and energy. These are game changers,” says Picard.