One of the more robust panel discussions occurred on one of the side stages at Morningstar Conference, where an honest debate took place regarding quantitative easing and volatility. The argument, in some respects, is consistent with those who see no problem with quantitative easing forever vs those that recognize at some point unconstrained money printing is an addictive drug that needs to be withdrawn from the system.
Quantitative easing is sitting on a powder keg
“Quantitative easing is sitting on a powder keg, and bad things could happen once the velocity of money takes a turn,” said Scott Schweighauser, President of Aurora Investment Management, an alternative fund of funds manager. “At some point volatility will be normalized when interest rates start to normalize and the taper ends.” Such “rational volatility,” a term Schweighauser uses to describe the normal process of volatility ushering in free market trends.
In arguing for a more traditional approach to monetary policy, Schweighauser might have found a partner in the argument from David Rolley, vice president and portfolio manager at Loomis Sayles, who runs a global income fund and works in emerging debt.
“Unlimited leverage will always be abused,” Rolley said. This can be seen looking at recent history for examples while also considering current derivatives exposures of large US banking institutions.
“After long periods without problems, regulators get captured by people who they are regulating and things drift in the wrong direction,” Rolley said. Rolley’s fund lends money to sovereign nations and businesses and is very concerned about old school credit worthiness, a lesson of 2008 that wasn’t learned by all. “History repeats itself.”
What does David Rolley considers for bond investments
When considering bond investments, Rolley considers healthcare and looks for reliable revenue streams, differentiating between firms that have built a diverse product set and strong distribution network and those firms gambling on hitting the jackpot with a single miracle drug. Taking this investing theme a step further, he likes Uber, the taxi service that doesn’t pay government tax, but doesn’t like lending against traditional taxi cab medallions, a sign of the times.
Chris Wallis, an equity portfolio manager with Vaughn Nelson, was more optimistic on the economy. Wallis believes we are going through a third industrial revolution where technology will require business to higher fewer people and there will, not a lot of jobs, but he expects to see entirely new industries created.
Wallis thinks we might see volatility and a correction before the pull back of quantitative easing, known as the taper, with the next correction potentially in the 5 to 10 percent range, not 3-5 percent. Bemoaning the difference between institutional stock pickers, “who lose their jobs when the market blows up,” and those such as Rolley in the credit market. Those investing in bonds still have their jobs after credit market blows up, which are characterized as a “market event” impacting all.