An Interview with Jason Trennert
Jason Trennert is the chief investment strategist at Strategas Research Partners, a Manhattan-based advisor to institutional investors, which he co-founded three years ago. Institutional Investor magazine has consistently ranked Trennert one of the top strategists on Wall Street. He's also been named to SmartMoney magazine's Power 30 list of the most influential people in the world of investing. A regular guest on CNBC, he is also widely quoted in the financial press and read by the world's top money managers where he has earned a reputation for his candid and thoughtful market observations.
Before launching Strategas, Jason made his mark during a successful 15 year stretch at International Strategy & Investment Group (ISI) where he distinguished himself by building and overseeing the firm's popular company surveys and its investment-strategy group. Now leading the charge at Strategas - the firm he launched with two other ex-ISIers, Nicholas Bohnsack and Don Rissmiller - Trennert and his team continue to offer probing market analysis and non-consensus calls.
RealClearMarkets: A lot of investors have been caught off guard by the stock market's strength and resiliency since the early March bottom. This skepticism convinced many that a big September pullback was all but inevitable. It didn't happen. Now they're pushing the correction call back to October, November, etc. Where do you think we're headed? Do stocks still have room to run?
Jason Trennert: By our lights, the central tension for investors is the cyclical versus the secular. In the short term, we've been telling our clients that it is more dangerous to be short than to be long. This is simply because a combination of cyclical forces - namely inventory rebuilding and as-yet unspent stimulus - is likely to provide the basis for better-than-expected economic and earnings growth.
While we believe a lot of this growth will wind up being ephemeral once the effects of government stimulus fade, few of us are going to be able to tell the difference between the start of a real economic cycle and one simply created by ever-greater amounts of public spending. There is still $3.5 trillion in money market funds earning virtually nothing out there and policymakers - both fiscal and monetary - are doing their best to get people take on more risk.
Having said this, the secular, or long-term outlook for the market is not as bright. In the postwar period, most economic cycles in the U.S. have been driven by pent-up demand from interest rate sensitive sectors like housing and autos. We think it's safe to say there is little pent-up demand for these sectors today and that consumer spending as a percentage of GDP is likely to fall.
Perhaps more important, the growing federal budget deficit is likely to be a powerful headwind for market returns in the future. The government can't simply dissave by $1.5 trillion a year without some cost - either in the form of higher long-term interest rates, higher taxes, or both. So far, neither of those costs appear to be evident. Simply stated, we're "bullish until the bill comes due." We think that bill will likely arrive sometime by the second half of 2010.
RCM: What's your forecast for the U.S. dollar? Do you think we're nearing a bottom? And on a related note, what's your take on gold? Jim Rogers grabbed headlines recently saying gold is headed past its inflation-adjusted all-time high of $2,300 sometime this decade. Do you think he's got the story right?
Trennert: It is, in truth, very easy to make a bearish case for the U.S. dollar. Our fiscal policies don't inspire confidence at the moment and the Fed continues to monetize our debt. Historically, this has not been a great recipe for currency strength. The problem of course is, what's the alternative? Resource-based currencies like the Australian and Canadian Dollar are interesting but aren't large enough to step into the breach. This has tended to lead people to question fiat currencies generally and be drawn to hard assets.
I have never generally considered myself to be a big fan of gold, but I must say, I own gold stocks today as a hedge against what I see as over-expansive fiscal and monetary policies in the developed world.
Separately, my discussions with clients lead me to believe that gold is NOT over-owned, especially in the institutional investment community. There is still a stigma attached to what is considered to be a "barbarous relic" that suggests to me that it can go higher. A client with considerable experience reminded me recently that "there ain't no fever like gold fever."
RCM: You recently observed that the U.S. economy is geared for consumption, and that we've got some tough sledding ahead of us in terms of growth, since consumers are curtailing spending and reducing debt. Likewise, some other savvy market veterans seem to be taking it a step further, predicting a seismic shift in reduced consumer spending for years to come. Do you agree with this generational consumer spending shift call?
Trennert: It is hard to know whether there is something special about the American consumer that allows him to, despite his better judgment, consume beyond his means. Frankly, I believe our consumption binge has not been a function of something special in the American psyche but simply ever-cheaper and ever-greater access to debt. Like it or not, that era is over.
The structured finance market will never look the same and even if American consumers wanted to re-leverage, new regulations will make it hard for the financial community to put Humpty Dumpty back together again. At the margin, I think we're in a more generational shift toward greater saving on the part of the American consumer.
RCM: Back in August, you wrote a Wall Street Journal op-ed arguing that the Fed-by monetizing our debt-is preventing the bond market vigilantes from imposing any sort of discipline on a new administration determined to spend more money. How is this movie going to end?
Trennert: This is especially worrisome to us at our shop, not merely because of the current size of the deficit, but the size of the new spending plans now being proposed. Right now, the Fed is worried about the potential for deflation and is willing to go along. Eventually however, if fiscal policies are left unchecked, some adult supervision may be necessary, putting fiscal and monetary policy on an eventual collision course.
Right now, it doesn't seem as if there is an enormous cost, save the decline in the dollar, to our policy mix. Eventually, however, greater inflation, especially in commodities, may force the Fed's hand in soaking up the liquidity it so generously provided over the last two years. My personal belief is that this is, in part, some basis for the "beat-the-clock" nature of the Administration's latest spending initiatives.
RCM: On a related note, a few weeks ago I asked hedge fund manager Doug Kass to consult his crystal ball and reveal what he envisioned for America twenty years down the road. His forecast was far from optimistic. In fact, his final quote was, "After years of greatness, the U.S. is destined for not so greatness." What do you think? Are you ready to hop aboard the Kass train and declare America's best days behind her?
Trennert: I don't think so but I am, at heart, an optimist. I am reminded of the quote from President Clinton when he said, and I'm paraphrasing, "there is nothing wrong with America that can't be fixed by what is right with America." Our society is nothing if not dynamic. It's hard not to believe that a lost decade in the economy and stocks is possible while we restructure - taxes, regulation, interest rates, and inflation, are all likely to get worse and put pressure on earnings multiples.
Still, I fundamentally believe there is something inherent in our system that will allow us to make the changes we need to once again assume our place as that "shining city on a hill."
