Comparing the U.S. economy to a heart attack victim, Pimco's Neel Kashkari said: “We managed to save the patient's life, but he's still on the gurney and he's still overweight.”
In his keynote speech last Monday at the Financial Planning Association's annual conference in San Antonio, he gave financial advisers a cautious, critical and sometimes gloomy perspective on what lies ahead for the United States and global economies.
“Right now, we're looking at private-sector deleveraging, high unemployment, re-regulation and restrained globalization,” said Mr. Kashkari, a managing director and head of global equities at Pacific Investment Management Co. LLC.
Even though government stimulus efforts did much to lessen the effects of the 2008 financial crisis, the United States remains in a “bubble economy” that will take time to resolve, he said.
“For 30 years, our economy added debt that led to added consumption that drove up GDP and, in turn, drove up asset prices,” Mr. Kashkari said. “The total debt in the U.S. economy went from 125% of GDP in 1950 to 250%, and then we had that heart attack in the financial system.”
There have been a few positive side effects of the financial shock of the past few years, including a decrease in debt at the consumer level, Mr. Kashkari said, noting that total household debt in America peaked at $12.1 trillion in 2008, up from $4.5 trillion in 1999.
It has since declined to $10.5 trillion and “the consumer is not done paying down debt,” Mr. Kashkari said.
Of course, consumer thrift means less spending, which doesn't help fuel an economic recovery.
“We've tried multiple things to get people to spend more, including "cash for clunkers,' which was probably the worst piece of policy in history,” Mr. Kashkari said, referring to the government's $3 billion program in 2009 that was designed to encourage consumers to buy new vehicles.
WHY TAX INVESTMENTS?
He challenged the logic of imposing higher taxes on investments.
“We want people to save and invest, but we tax income and savings,” Mr. Kashkari said. “You could replace those kinds of taxes, dollar for dollar, with consumption-related taxes.”
The Federal Reserve's monetary policy eventually will achieve the desired goal of modest inflation, a scenario he described as good for equities.
“If we were in a deflationary world, you would want to be in cash or debt because as prices around the world shrink, your pricing power will go up,” he said.
“If we can engineer moderate inflation, you will want to be in equities,” Mr. Kashkari said. “But if they let that inflation get away and it turns into high inflation, you want to be in gold, commodities and other hard assets.”
Mr. Kashkari also said that Americans' portfolios tend to be too concentrated in domestic investments.
“Right now, the growth is largely coming from the emerging markets and commodity-producing countries, but we all have a home bias when it comes to investing, which is human nature,” he said. “It doesn't mean you don't invest in America at all; it means you should be positioned to invest globally.”
Along with his faith that the Fed will create the right level of inflation, Mr. Kashkari also is optimistic that “two-thirds of the fiscal cliff [deadlines] will be extended for a year or so.”
jbenjamin@investmentnews.com Twitter: @jeff_benjamin
