Speaking at the annual Perfecting Investment Portfolios Forum in New Zealand recently, Tribeca portfolio manager Chris Daily noted that “debt blowouts happen all the time”.
“Good policy balances fiscal and monetary response to achieve nominal GDP growth in excess of total debt growth,” said Mr Daily.
“The US had been in debt like this before many times, typically as a result of financing a war,” he added.
At times like these, investors should think like a central bank when making decisions about their portfolios, Mr Daily said.
“You should be more reluctant to sell during a bull market in equities despite valuations, [since] the central bankers would be forced to grow nominal GDP in excess of debt growth,” he said.
“The current debt burden is actually bigger than the World War II debt pile as the private sector hasn’t been deleveraging anywhere apart from the financial sector.”
As a result, QE is likely to be around for between five and 10 years rather than three to five years, he said – noting that World War II took 30 years to deleverage.
“Hardly any deleveraging has occurred at the global level. Japan, UK and Europe are left with only one practical option: inflation, but hopefully with real growth,” said Mr Daily.
“The US, Canada and Australia have more options but will also pursue real growth plus inflation.”
Closing the conference, van Eyk chief executive Mark Thomas agreed that investors should think like central bankers – and encouraged them to keep their equity allocations up.
With all of the debt around the world it’s not likely in my view that [central banks] will rush interest rates up at the long end because they can’t afford to,” said Mr Thomas.
“They’ll have defaults and that will be deflationary and that’s the worst possible outcome that [central bankers] are trying to avoid.”
