Rob Arnott On Bubbles, Inflation, And Once-In-A-Generation Investment Opportunities
As of today, keen observers such as Rob Arnott can discern grim portents about the economic and political future of the United States. Of course, circumstances can change, but at present, both political parties have surrendered fiscal restraint, spending at will when in power and debasing our currency with measures that rapidly increase money supply and force interest rates to very low levels. The days when Republicans represented cutting costs and letting the markets direct themselves are not just gone, they seem to have evaporated from our memory. The GOP still pays some lip service to the era of Ronald Reagan, but they show no commitment to the principles that made that era prosperous.
I recently had the pleasure of chatting with the brilliant entrepreneur, economist, and money manager Rob Arnott on my podcast Meeting of Minds. Rob is the founder of Research Affiliates which advises more than $150 billion, and he’s written over 100 academic papers and several books. He’s dedicated an incredible amount of time and thought not just to managing money well, but also to nurturing and promoting the ideas and factors that influence markets, including politics. That kind of holistic perspective is rare and incredibly valuable, and it’s no surprise that Rob is one of the leading minds on these issues.
During our conversation, Rob succinctly summed up the situation many of us find ourselves in: “My core political principles are really simple: It’s personal liberty, economic freedom, respect for the constitution, and limited government. For 2020, I don’t know which party showed respect for any of the 4.”
Supply-side economics isn’t the only ship that’s been abandoned, even the cruise ship the S.S. Keynes is being deserted. “Even Keynes thought you run surpluses during the good times so that you can afford to run deficits during the bad times, and inflation is the enemy of everyone,” said Rob. “Those are out the window. So people […] claim to be Keynesians, [but] the neo-Keynesians have a radically different worldview in which inflation is desirable and in which deficit spending through thick or thin is the right way to do things. It’s extremely dangerous.”
The current debates over whether a 2.5% annual inflation rate is too little, too much, or just right become pedantic when you zoom out and view it from a historic perspective. Again, Rob put it very well: “The difference between 2% and 3% inflation is, do you want the dollar to be worth 13 cents or 7 cents 100 years from now? It’s splitting hairs. It would be nice if the dollar’s worth a dollar.” If we’re struggling to keep inflation under control for 5-10 years, we may have already lost the will to fight. To quote Rob, “You can keep [inflation] under control for hundreds of years if you’re determined…” And we, it seems, are not determined. The problem is the will, not the way. We know how to do it. If you’re a student of economics and history, you know that with the political will inflation can be controlled — the Byzantine empire maintained the stable purchasing power of their currency for over 600 years.
Once again, the ability to pull together a comprehensive view of the interplay between the economy, markets, and politics is essential. “There’s a lot of misconceptions out there about the linkage between the economy and capital markets, that linkage is more tenuous than most people think,” Rob said. Bad policy can go together with good market performance at least for a time, and vice versa. There are unexpected interactions between politics and markets — for example, flights to safety during bad economic environments and the unexpected benefits to large incumbent companies during periods of crony capitalism.
If politics are linked with markets and the political outlook in the United States is poor, what is a smart and patient investor to do? For starters, work on dropping the home bias favoring domestic investments. So many people think diversification means spreading investments across sectors or asset classes but within the U.S., totally ignoring the obvious concentration risks of only investing in a single country.
Click here to listen to the full fascinating discussion Rob and I had, I think you’ll find it eye-opening. You can also click here to watch a video of our chat. Here are just a few of the questions we covered:
- What happens when you invest with your eyes on the rearview mirror?
- How do markets differ when a country is led by a socialist compared to a libertarian?
- Are small- and mid-cap investments more attractive now than large-cap ones?
- How did Byzantine Empire ruin the 600-year stability of their currency?
- What is “Maverick risk” and how dangerous is it?
- Are Americans going to be boiled frogs or Thelma and Louise?
- How much of Rob’s investments are in Emerging Markets?
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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