It’s not a bumper sticker (yet), but to think global and invest local is good financial practice according to First Friday speaker Michael A. Tyler, Chief Investment Officer of Eastern Bank Wealth Management Division.
Michael began with an economic overview, saying the summer 2015 rebound was welcome, but it’s been choppy and erratic. The drivers of the economy– what’s worked and what hasn’t worked – has changed dramatically over the last several years.
For instance durable goods – those major investments like houses and cars – have been a big disappointment. Usually if you put money into your house you also put money into upgrades, which we see in a capital upgrade cycle. This hasn’t happened despite housing prices going up.
When the economy went over a cliff in 2008 and ’09, he said, banks wouldn’t lend and we had no opportunity to invest. So we made do with less and kept old things longer. The average age of the cars on the road right now are 11.5 years old.
In the last eight months capital spending has dropped more. Michael’s hypothesis is that we simply don’t have confidence yet. We also don’t have a sense of urgency as a country because there is no inflation. As interest rates go up, it will start creating demand for money (locking in loans at lower rates).
A strong dollar and low oil prices have restrained consumer price indexes. When we don’t have inflation, its hard to rebuild the vigor of the economy, however CFOs in Massachusetts are more confident in their outlooks. Massachusetts employers believe the economy here is better than the country as a whole.
The American public may still be financially leery, but the last four years have seen a slow and erratic climb to what economists call full employment. Long term unemployment however is still a big problem as people take longer to get back to work.
This is partially because Americans are less mobile than we used to be. We were the most mobile workforce in the world a generation ago, but as women entered the workforce it became evident that a two-earner family is a less mobile family. Furthermore, the skills required for good jobs are higher and more specialized now, making it more difficult to change jobs. Michael added that technology has made a lot of jobs obsolete, as we produce what we need with fewer people.
What does this have to do with thinking globally?
What happens there matters here. It effects the price we pay and the flow of goods across borders. Our economy is in much better shape since 2008, while other global economies have not had the same recovery. Europe struggles with deflation, where prices remain under pressure due to slow growth and low commodity prices.
The biggest things we trade are money and energy.
With unemployment down and the dollar firm, the Fed has good reason to raise rates, but persistently low inflation suggests no change. When the feds start talking about higher interest rates, the dollar goes up. Investors take advantage of a rising dollar and demand goes up. Falling rates abroad and rising rates here equals a stronger dollar.
If you are an exporter trying to sell to Europe, the exchange rate just made your product more expensive. That’s a big deal for a lot of companies in Massachusetts.
The price of oil has collapsed because supply went up not because demand went down. Supply is at a 30 year high, which is crushing the price. Falling oil prices help consumers but hurt producers, which is a mixed blessing in the US. Consumers have more money to spend if they think prices are going to stay low. It’s when we internalize that prices are low and will stay low that consumer behavior changes and we start spending on things like vacations and Red Sox tickets.
In a US Market overview, Michael said equities are still near their all-time highs, while hedge funds and alternative assets still lag. The dollar will keep going up a bit but weak demand in foreign markets could stifle US earnings.
Investors should buy where expenses are in a weaker currency (Yen or Euros) and earnings are in a strong currency. Oil is priced in dollars, so as long as the dollar is strong, it’s still more expensive in Japan and Europe.
For the American stock market to do well, we need to see that when other countries are doing well, they are buying things. In China, they are transitioning from an investing economy – roads, buildings – to a consumer economy. If that consumer economy does well, we do well.
Merger boom often signifies the end of a bull market, Michael said. Buyers are beginning to have the upper hand in M&A. If you want to sell your company, now’s a good time but it will take longer than you thought so plan in advance. If you want to do an IPO, your window is starting to close.
Michael left us with one last bit of insight. “The most infallible indicator I have seen is the Super Bowl,” he said. “When the Patriots win, a Bear market begins.”
Prior to joining Eastern, Michael founded and managed West Shore Investment Management LLC, a fundamentally-driven long/short equity hedge fund in San Francisco. From 1986 to 2002, Tyler served as a partner, portfolio manager and equity analyst at Wellington Management Company LLP in Boston. At Wellington, he built the firm’s telecom investment practice and managed mutual funds specializing in the global telecom industry.
Tyler is a Chartered Financial Analyst and earned his bachelor’s degree with honors from Princeton University and a Master in Business Administration degree with highest honors from Harvard Business School. He served on the board of Congregation Sha’ar Zahav in San Francisco, for whom he also co-edited and published an LGBT-themed prayer book.