On the Record: Ready for an 8-second ride?
Friday, March 28, 2014 7:00 AM
Ready for an 8-second ride?
Here comes the bull market. Or at least that’s what Jim Paulsen, Wells Capital Management’s chief investment strategist, told the audience at last month’s CFA Society of Iowa Investment Strategy Dinner. Paulsen has often been cited by Business Record columnist Dave Elbert, so I was excited to hear him speak. He didn’t disappoint.
He predicted that we aren’t even halfway through the recovery yet and that our economy will grow at an average of 3 percent for the rest of the recovery. Then it got interesting. The reason he thinks we’re only halfway through is that “it is going to take another five years before you all get confident enough in the future that you start doing stupid things again that bring the next recession,” Paulsen said. “I have every confidence that you will blow yourselves up again.”
Paulsen said fears about potential financial Armageddons are the primary drag on several key indicators that have lagged and created gaps. This led him to say that our biggest asset for growth is the re-establishment of confidence. He said about 15 months ago, a switch happened in confidence, and instead of worrying about the world ending again and again, we finally shrugged our shoulders, looked around and realized the world was still here. Confidence went from postwar lows to five-year highs, causing people to have a longer view of the horizon.
What comes next, he said, is the stage of confidence where we finally decide we’re entering a true recovery. And that’s the fun stage.
“This is where animal spirits show up,” he said. “This is where some of that $2.2 trillion comes off of our balance sheets. This is when you guys start ratcheting up your risk exposure. At the very top of this stage is where you finally start doing really stupid stuff. And that will bring about the next recession. But I think that’s a few years away.”
The stock market will be volatile this year, he said, but his one piece of advice?
“Just ignore it. Who cares,” he said. “Get ready for what comes next, which I think is a resurgence of the bull market in 2015 and beyond.”
So, what’s the next bust?
The short answer is we likely haven’t invented it yet. Paulsen pointed to the ‘80s being ruled by strip malls, then being the epicenter of the crisis in the ‘90s. Then the ‘90s being ruled by the Internet, a term we didn’t have in the ‘80s, before busting in the early 2000s. And of course refinancing, which wasn’t a focus of the ‘90s, but became the epicenter for the most recent bust. “So, I’m not even sure we know the word yet, or what will bust, but I have every faith in capitalism that we’ll come up with something,” Paulsen said.
Innovators, imitators and idiots
I met with Sayer Martin, the immediate past president of the CFA Society of Iowa and one of the people responsible for starting the annual dinner. He’s currently the president and CEO of Sagacious Inc., which develops and implements customer relationship management-based solutions for wealth management firms. Paulsen’s words of warning reminded him of the often-quoted portion from Warren Buffett’s PBS interview with Charlie Rose in 2008. Buffett was asked if people should have known better with regard to the housing and financial crises. Essentially Buffett said that there is a natural progression that occurs, in which, first come innovators who see opportunities that others don’t, then the imitators who sometimes improve but often tarnish the idea, and lastly the idiots, whose greed for wealth ultimately undermines the innovation. The interview transcript, I thought, provided a great contrast to our current economic position. Read it here: http://cnb.cx/OOiZw7
Speaking of idiocy
Remember how mortgage-backed securities played out? Well, all this talk of the next economic implosion has me thinking about what some are calling the next big innovation in financial engineering: rental-backed securities. Essentially investors, such as private-equity firm Blackstone, bought up foreclosed homes and started renting them. Here’s the twist. Last November, Blackstone securitized this and rolled out the first ever bond backed by home rental income. Others have followed suit. I don’t have room for a full explanation, but the Atlantic article I read in October (http://bit.ly/1gSjdZc) and this Wall Street Journal article (http://nyti.ms/1ezIQ0o) from late January will do a much better job - trust me, it’s fascinating. Reporter Kent Darr checked a few months ago to see if any of the large outside investors were buying up houses in our market. He found no trace of it, likely, he was told, because our housing market hadn’t been hit as hard by the recession.
Good sign on the startup front
Planning is underway for the second annual I/OWA Conference, a conference for innovation and entrepreneurship. Geoff Wood, chief operating officer of Startup Genome and founder of Welch Avenue, and a group of volunteers from the Des Moines startup community hope to announce official dates in May. Why is this a good sign? Well, last September, Silicon Prairie News - which still has operations in Des Moines but is located in Omaha - announced it was pulling the plug on its premier Des Moines startup conference, Big Des Moines. A group of volunteers chaired by Wood, the former editor of Silicon Prairie News Des Moines, swooped in and with the help of sponsors threw together the first I/OWA Conference in just four weeks. It’s a nice signal for the health of the startup community that the conference will continue. For more information and to see videos of last year’s speakers, go to Iowaconf.com
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