POLITICAL STALEMATE CRIPPLES BOTH US AND EUROPE
By Vanessa Drucker
In the first of a new ongoing series, Global Finance sits down with Jason Trennert, managing partner and chief investment strategist at Strategas Research Partners.
Trennert, Strategas Research Partners: The financial markets in Europe may need to move substantially lower to give policymakers political cover to do what is unpalatable
On October 3, a roundtable discussion with Jason Trennert launched an ongoing series of “Global Salon” events at Global Finance’s new headquarters in New York. Trennert, managing partner and chief investment strategist at Manhattan-based Strategas Research Partners, led a conversation on key economic observations.
Trennert’s overarching theme centered on political stalemates, both in the United States and Western Europe. In his view, the “bill came due” in the US last summer on August 2, when Congress created a Super Committee to negotiate deficit reductions. Expectations from the Super Committee are modest, however; any grand bargain could surprise markets into an explosive rally. “I’m more hopeful than the consensus for a positive outcome, but we probably won’t know until the eleventh hour, before the next election,” Trennert warned.
The US debt ceiling debate highlighted how “divisive and unresolved” US politics have become, with negative economic implications. Moreover, regulatory uncertainty—in healthcare, finance and environmental arenas—is making it difficult for businesses to plan ahead and could prompt capital “to go on strike.” A similar scenario occurred in the US in 1937, when the economy relapsed into depression in reaction to then-president Franklin Roosevelt’s Second New Deal legislation—and the resultant shifting rules of the game.
The discussion noted the extreme discrepancies between robust corporate profits and high US unemployment levels. Trennert attributed the weak labor market to the housing overhang of 4 million homes, noting that US entrepreneurs and small businesses often derive their start-up capital from their home equity. At the same time, consumption remains stable at 71%, and there is little prospect for further government stimulus spending. Thus, US economic growth has become dependent on investment and net exports. It follows that more protectionism is likely to drive the political process, both from left and right wings—including the Tea Party, according to Trennert.
Trennert described how “unsustainable” European financial conditions offer little hope for avoiding recession in that region. While full scale monetization of sovereign debts by the ECB may be required, so far European policymakers have only pushed temporary solutions to “get them through the night”. Unlike the Federal Reserve, which has expanded its balance sheet from $800 billion in 2008 to $2.8 trillion today, the ECB has declined to follow suit. Trennert predicts that the eurozone must move either fiscally closer together or monetarily further apart: “In the meantime, the financial markets may need to move substantially lower to give policymakers political cover to do what is unpalatable.”
Trennert addressed some promising investment areas. He still regards the US as the “best house in a bad neighborhood,” both blessed and cursed by its dollar reserve currency. With bonds yielding scant returns, he added that American equities “are your only shot,” thanks to so-called financial repression: “Policymakers might engineer the system to pay lower real interest rates, in the hope that inflation will eventually chew up principal.”
Strategas has assembled a list of 54 US companies with lower credit default swap spreads than the US government, which the firm appropriately labels the New Sovereigns. Trennert also foresees higher gold prices ahead. Although it is still predominantly owned by retail investors, gold’s decade-long run-up nonetheless reflects lost confidence in all fiat currencies, including the US dollar, he said.