Ron Muhlenkamp’s presentation from Muhlenkamp and Company’s conference call held on April 24, 2014.
Muhlenkamp and Company
April 24, 2014/4:15 p.m. ET
Anthony W. Muhlenkamp, President
Ron Muhlenkamp, Founder & Portfolio Manager
Ron Muhlenkamp’s Presentation
From an economic standpoint and a little bit from a world standpoint, most of the trends that we saw in place and have been talking about the last several years remain in place. Let’s begin from the far-reaching, then bring it back home.
Russia’s in the news with Ukraine and Crimea, and that may have sizeable effects on Europe in the future, but it really doesn’t have much near-term effect on the economics of what goes on.
Japan, of course, just raised their consumption tax a year or so ago. They went into their version of quantitative easing which helped boost their markets. They didn’t follow through with underlying structural reforms. The last time they raised their consumption tax it kicked them into a recession, so we think that what Japan did (their version of quantitative easing), has run out of gas and they’re now facing major headwinds with this consumption tax.
Various countries in Europe continue to flirt with recession or default. What’s fascinating is that the interest rates on the bonds of all these sovereign nations have come down big time—and they’ve managed to do that without printing a euro to get their interest rates down. Compare that with what our Fed has done to get interest rates down, having printed something like $2 trillion. So who got the better part? We don’t know, as Europe has not yet fixed their problems and it doesn’t look like they’re in any big hurry to do so.
We’ve said for the last several years that the cyclical part of the world economy was being driven by China. Of course, China is slowing down. They’re continuing to try to shift the focus from infrastructure spending to consumer spending. My guess is they will manage to do that, but it’s a long, drawn-out process. In the meantime, most of their numbers are coming in less than they had expected.
Everybody on this call knows that, last year, when our Fed started to taper—it [the tapering] started working through the hedge funds and where they had monies in the carry trade. This affected the emerging markets, beginning with China, big time. That seems to have settled down.
Which brings us to our home turf of the U.S. We continue on a slow growth path of roughly 2 percent. People keep saying, “When the economy picks up…” but they’ve been saying that for five years now! The economy has been growing at 2%, which means corporations haven’t had to build plants or buy equipment. (You usually get 2% growth out of “de-bottlenecking.”) After five or six years, however, some of the equipment should be getting old and wearing out. My guess is that the capital spending will pick up a little bit; frankly, it’ll pick up more than hiring does.
The two big lagging indicators in our economy have always been capital spending and employment. That’s because companies don’t usually make decisions to spend money until they feel confident they know the plan going forward, or, to some extent, what the economy going forward will be. If GDP (Gross Domestic Product) growth remains at 2%, they’re not in any big hurry.
We have gotten interest rates back to reasonable levels; i.e. if inflation’s at 1.5% and the economy grows at 2% (which is roughly where we are), then the 30-year bond should be about 3.5% (which it is). For most of the last five years—the last three or four years, in particular—we’ve said that bonds weren’t a good investment. They’re at least no longer a negative. You can make a little bit of money (depending on what tax bracket you’re in) over taxes and inflation on the 30-year bond. The 10-year is somewhere in there—it’s no longer a fixed negative, such as CD rates and Treasury bill rates (which are below inflation). Historically, short-term rates have equaled inflation and long-term rates have equaled inflation plus real GDP. Long rates are back in that range; short rates are not.