GMO, Boston's $104bn asset-management firm, has 'given-up' on the bond market. However, this is not a clarion call for equity bulls, as the FT reports [6], GMO's head of asset-allocation Ben Inker notes the only time he has held more cash was in late 2007, before the financial crisis. Today's equity valuations, he notably points out, are predicated on today's profit margins being sustainable and he thinks US corporate profits are set to fall - even if growth picks up. Critically, this smart-money cash-hoarder rightly sees the problem as one prominent during the presidential election - that of income inequality. "One of the things that happens as profits grow as a per cent of gross domestic product is income becomes more and more unequal because the ownership of capital is extraordinarily uneven. And there's a natural tension that forms there from a societal perspective." So far, Inker adds, government spending has supported the economy and so profits. But a pick-up in growth requires higher consumption, and the only way to get that is through higher incomes, which must come from profits. So that's where the dry powder is Maria - in the smartest investors' hands.
Via FT [6]:
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But his dislike of fixed income does not mean he is a fan of stocks...
Rather, Mr Inker says that he is waiting for better times; forty per cent of a benchmark free asset allocation hedge fund he oversees is in “dry powder”.
The only time it has held more cash was in late 2007, ahead of the financial crisis, he says. A tenth of the portfolio is in emerging market and asset-backed paper and the rest is in stocks for want of anywhere safer.
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However, he thinks US corporate profits are set to fall even if growth picks up, in part because of an issue that was prominent in the presidential election – growing income inequality.
“One of the things that happens as profits grow as a per cent of gross domestic product is income becomes more and more unequal because the ownership of capital is extraordinarily uneven. And there’s a natural tension that forms there from a societal perspective.”
He says that since the financial crisis, government spending has supported the economy and so profits. But a pick-up in growth requires higher consumption, and the only way to get that is through higher incomes, which must come from profits.
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A disorderly break-up of the euro remains the big “undiversifiable risk”, says Mr Inker. Emerging markets are fairly valued but “scary” due to the unknown path for China.
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