Thursday, June 23, 2011

Investment manager Rob Arnott’s plan to weather the U.S. ‘debt hurricane’

Arnott is a pro's pro.
From MarketWatch:

QE2 is steaming into port, and Capt. Bernanke is about to broadside the S.S. United States.
That’s the view of Robert Arnott, an influential voice in the study of portfolio asset allocation, indexing and risk management, and founder of Research Affiliates, a Newport Beach, Calif.-based investment management firm. 

Arnott hasn’t always been so pessimistic about the future of the U.S. economy, but nowadays he sees the dark clouds of what he calls a “3-D Hurricane” — a perfect storm of deficits, debt and demographics that Arnott said creates “serious headwinds for investors in the years ahead.”
For starters, the U.S. budget deficit is much bigger than it appears, Arnott said. When obligations for Social Security, Medicare and Medicaid are counted, the already-bloated deficit balloons. Add in state and local debt, and the national overhang exceeds 500% of U.S. GDP, Arnott said. “Think about what you made last year, multiply by five, and that’s your personal share of the national debt,” he noted.
The question, Arnott said, is who pays this debt? That becomes a demographic problem for the U.S. “Our population is aging and our working age cadre will be shrinking as a percentage of the population,” he explained. 

With more retirees and fewer workers, the economy will slow, Arnott said. Declining GDP growth will pressure corporate earnings and dividend growth. Meanwhile, Arnott said, if the U.S. has trouble paying its bills, policymakers may decide to reduce the value of the debt by printing more and more money, debasing the U.S. dollar and spiking inflation. 

“If we turn to the printing press as the way to reduce the value of our debt, which I think we probably will, that creates inflation risk,” he said. 
“I don’t want to be seen as a prophet of doom,” Arnott added. “What I’ve described is a doomsday scenario if we harbor the illusion that we can spend the way we’ve been spending.” 
With that in mind, Arnott favors investment strategies that fall outside the mainstream now, but which he said could become increasingly common if Washington tries to inflate its way out of debt:

1. Dump traditional asset allocation ...MORE 

Previous posts on Mr. Arnott: 

"Robert Arnott's Magic Indexing Formula" 

We have so many posts on Arnott that it is probably easiest to do a Google search of the blog: robert arnott