The Global Risk Nexus:Economics, Politics, Policy & Markets

Jay Pelosky, Founder Pelosky Global Strategies

www.pelosky.com

MSCI Institutional Investor Conference

NOVEMBER 1st, 2016

ECONOMICS

Global Growth Deceleration

Potential Growth Rates

US & EU Natural Rates of Interest = 0% (Real Rate that Balances Monetary Policy so it is Neither Accomodative nor Contractionary)

1990s 2016

US 3.3% 1.75%

DM 2.25% 1.16%

EM 7% 5%

Key Growth Inhibitors

Poor Demographics In Both Developed & Emerging Economies - Getting Old Fast

Declining Labor Productivity - US in Biggest Slump Since the 1970s. World Productivity has Collapsed from 1.8% to 0.5% pa.

50% + of Global GDP Yet No Global Locomotive

Emerging Economies

Terms of Trade down 20%, Sov. Debt Downgrades at Record

Domestic Demand Growth Capped by Income/Debt Levels

Getting Old Before Getting Rich

Low Growth World is Here to Stay Over Foreseeable Future (3-5 yrs.)

Key Economic Takeaways

Declines in Potential Growth Rates & Natural Rates of Interest are GLOBAL

Drivers are Powerful, Long Term Factors that are Unlikely to Reverse Quickly

POLITICS

US, Europe (Germany, France, Netherlands) + China/India/Iran = over 50% Global GDP

2016-17 Global Electoral Cycle

As Political Risk Rises, Investor Risk Appetite Declines

 

Trump a Symptom not a Cause – Divided Govt. Post Nov 9th

Weak Global Economy Leads to Rise of Inequality, Populism &

Authoritarianism

Politics in a “Post Truth” World 

Loss of Faith in Elite Competence & Sense of Fairness

 Corporate Earnings At Risk

What Replaces Globalization?

Finance, Tip of Globalization Spear, Broken Post GFC

Key to Avoid 1930s Style Rollback

A Big Data World needs Data

Referendums Dangerous

Brexit, Colombia Peace Vote, Italy…

No history = no data = no idea

Inability to Model Hamstrings Active Manager Community

POLICY

Monetary Policy Alone Leads to Limited Economic Growth

From QE to ZIRP to NIRP to Nowhere

Risk Loss of Faith In CBs and Major Stock Market Decline

Will Monetary Policy be able to Alleviate Recession (FFR at Start of Past Recessions over 5%, not 0.5%)?

From Opportunities for Capital to Opportunities for Labor

Austerity Economics

Policy Stagnation > Growth Stagnation > Stagnant Financial Returns

Shift From Austerity Economics to Investment Economics

Will Transition Blow Rates Up & Send Stocks Down?

Tricky Transition

From Pure Monetary to Joint Fiscal & Monetary…in the US, UK, Europe, Japan.

End of Deflation, Beginning of Inflation?

Short Policy Window to Boost Middle Class Jobs

Lurking in the Wings

AI and the End of Working Man

Automation Could Eliminate 50% of Jobs in Next 15 Years

MARKETS

US Public Pension Fund Target Return = 7.5%

THE LOW RETURN WORLD

Last 20 Years = 7.2%Last 10 Years = 5.8%Last 1 Year = 0.3%

US Public Pension Fund Actual Returns

What Happens to Returns when the Next Recession or Bear Market Hits One

or Both Asset Classes?

THE LOW RETURN WORLD

US Economy in 7th Year of Economic Expansion

US Stocks and Bonds Close to All Time Highs in Price & Valuation

Or Both?

Where IS the RIsk?

Is the Risk in SPY @ 2200?

Or the 10 yr. UST @ 1.75%?

OUTLOOK

Don’t Bemoan Globalization’s End – Celebrate Regional Deepening

Economics

Asia, Europe & the Americas Each Benefits from Three New & Mutually

Reinforcing Growth Factors that Provide the Ability to:

Tri Polar World Global Growth Model

Through the Rise of Urbanization, the Service Sector

Economy and Ecommerce

SELF FINANCE

SELF PRODUCE

SELF CONSUME

Through Growing Wealth Pools

Through the Rise of Advanced Manufacturing, Mass

Customization, 3 D Printing etc.

Rebuild Confidence in Global Economy; Focus on Better Outcomes

for Labor; Replace Austerity With Investment

Politics

It’s All About the Response… the Response to the Rise of Populism &

Authoritarianism. Can the West’s Political System Self-Correct?

Ladies Choice: Hillary Clinton, Theresa May, Angela Merkel, etc.

Saudi Arabia’s Ability to Weather Its Oil Related Budget Shortfall

Policy: 3 Challenges

Developed Economies’ Transition Away From Pure Monetary Policy

China’s Ability to Manage Its Debt Load While Pres. Xi Seeks 2nd Term

The Rise of the Millennial/Robo Combo

Continuation of the Low Growth, Low Return World

Sustained Focus on Fees & Performance

Pension Fund Revolution

MarketsFour Drivers to the (Passive) Future

LOSERS

Active Managers

Legacy Buy & Sell Side

Hedge Funds/Liquid Alternative Strategies

Research Analysts

WINNERS

Passive/Smart Beta

Robo Advisory

ETF Strategist/Model Portfolio

Asset Allocation Specialists

Markets

Pension Fund 7 Step Guide to Survive & Thrive:

Markets

Spend Political Capital to Get Return Targets Lowered – the Sooner the Better. 7-8% Targets are Unrealistic… Think 3-4%.

Invest in Human Capital, Build Internal Asset Management Capability, Develop Cross Asset Expertise.

1.

Cut Costs. Public Market Beta Exposure, Stocks and Bonds, Should be in Passive, Min Vol Products.

2.

3.

Pension Fund 7 Step Guide to Survive & Thrive:

Markets

Prepare for Greater Competition – the Emerging Economies are about to Globalize Their Pensions.

Develop Partnerships & Co Investment Strategies Both Domestic and Offshore.

4.

Use Partnerships to Develop Regional Footprints & Gain Access to Best Local Opportunities.

5.

6.

Think about Structure – Pressures to Consolidate and Achieve Scale Back and Front Office are Only Going to Grow.

7.

The Global Risk Nexus:Economics, Politics, Policy & Markets

Jay Pelosky, Founder Pelosky Global Strategies

www.pelosky.com

MSCI Institutional Investor Conference

NOVEMBER 1st, 2016