It’s Monday morning and it’s the first day of public sessions at the 2014 Milken Global Conference in Los Angeles. 2014 marks the ninth year that Principal Global Investors has helped sponsor this annual meeting of luminaries from business, government, and academia. There are around 3,600 attendees this year (a record), and it feels like the majority of them are crowded into to the main ballroom for the morning’s first session “The Global Economy: Hoping for Momentum amid Tepid Times.” CEO of Principal Global Investors, Jim McCaughan, moderated the session and led his panelists and the attendees on a guided tour of the various aspects that combine to create the global economy. First stop was the United States. The panelists all seemed to agree on U.S. GDP growth of around 3% in the near term, with acceleration later in 2014. One panelist, Joshua Harris from Apollo Global Management, rang a note of caution when he mentioned that the current U.S. expansion is about five years old, and that’s around the typical historical length of previous U.S. recessions. The optimistic side of the argument was that because the current U.S. acceleration was slower than most, that there were perhaps another two to four years left.
Jim then guided the panel from a U.S. discussion to look at the troubles that Europe faces as it struggles to grow. There was notably less optimism about the prospects for invigorated Eurozone growth. Jim began the topic by drawing attention to some of the European Union’s main problems, namely difficulties with their banking system and a cloudy view of how the European Central Bank will coordinate monetary policy across the Eurozone. To put the EU’s banking issues in context, the panel pointed out that while the United States and the EU have roughly similar GDPs, banking is a much larger chunk of the EU’s GDP, further bolstering that sector’s importance to (and influence on) the overall economic health of the Continent. All wasn’t gloom and doom though. Joshua Harris opined that Europe could be an “interesting place to invest if you can get ahead of the banking issues.”
Interest rates were another big topic of conversation, and a place of divergent opinions among the panelists. After showing a chart of the 10-year Treasury rate for the past 50 years, Jim pointed out that the trend didn’t seem to show any mean reversion. With that, he asked, what does “rate normalization” look like. Several panelists saw long-term rates between 2% and 3% for the near term, but the question in the air was ‘how long.’ Jim’s opinion was that rates will probably stay lower than most people think for a long time. One panelist took the opposite tack and posited that recent communications from the Federal Reserve pointed towards Treasury rates moving up to 5% or 6% by late 2015 or early 2016. The reality of the situation is important to almost everyone, since all businesses are affected by interest rates.
One of the last topics for the panel was the current situation surrounding Russia. This too was a source of divergent opinions. Jim felt that the increased geopolitical risk emanating from Russia was the most important factor keeping U.S. equity markets subdued this year. What all the panelists agreed on was that Russia was a relatively minor economy on the global scale, and that the real issue was the potential destabilization that Russia’s actions could portend. Opinions differed on whether markets had fully recognized the potential for trouble. Some felt that a newly aggressive Russia was an important turning point, and one that markets have not fully acknowledged. The risk, according to this line of thinking, seemed to point toward significant tail risk in the event that Russia escalated and markets overreacted.
All in all, a very wide-ranging session and worth a look. When it’s posted, we’ll have a link to the full session on our Milken Global Conference landing page, which can serve as your single point of contact for Principal Global Investors’ participation and reaction to the important issues coming form this year’s conference. More later in the day!
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