Asset management
Ed Goard and Michael Vandenbossche of Munder Capital Management, talk with Cayman Captive about investment strategies, the threat of inflation and what captives need to look for when considering an investment manager.
Managing insurance assets since 1985, Munder delivers tailored
investment management services to its insurance clients, with more than $14 billion of assets under management. Here Cayman Captive asks for their views on asset management and the steps captives can take to maximise their investment position.
Let’s get right into the inflation question. Is US inflation a near- term problem for investors?
Ed Goard: It is our view that inflation is really not a near-term
problem. While conventional wisdom might tell you that current monetary and fiscal policy will generate inflation, we believe that the conditions for inflation to occur are simply not in place right now. The first of those issues is unemployment. Unemployment remains stubbornly high, at just under 10 percent right now, despite massive fiscal stimulus over the last year and a half. If you think about it, most of our domestic economy is driven by consumption, so with high unemployment and a still very shaky housing market, consumers right now are more focused on paying down household debt, as opposed to overconsumption.
The second piece of that puzzle is wage growth. And wage growth
really doesn’t happen until labour recovers, and with unemployment remaining high, wage growth is quite unlikely.
The third piece of the puzzle is bank lending. Currently, we are in a
liquidity trap, where the liquidity that is being provided by the Federal Reserve is really trapped behind unwilling lenders. The banks right
now are in the mode of repairing their balance sheets, so they are borrowing from the Fed or borrowing from customers at next to zero interest rates and trying to invest in longer-term government guaranteed debt such as treasuries, agency debentures and agency guaranteed mortgage-backed securities. This is great for the banks because it is repairing their balance sheets, but they’re not making new loans to consumers and to businesses, which is necessary to fuel consumption and growth, so you’re not getting the normal effect you would get in a conventional recession.
Finally, looking longer term over the next decade, we have
other things going on. For example, the social security pyramid is getting ready to turn upside down along with the retirement pyramid, so if you look at that over the next decade, our current fiscal policy is basically unsustainable. US government debt (federal, state and local) as a percentage of GDP is 114 percent, compared to its 55-year average of 67 percent. Government spending is at 24 percent of GDP, yet taxes are at 16 percent of GDP. We believe that this will result in a combination of higher taxes as well as lower government expenditure, with both of those likely to be contractionary.
Larger themes are re-regulation and tighter credit than we saw
in the 1980s, 1990s and early 2000s, and so we don’t believe that growth will be what it was in the early 1990s and 2000s. It’s hard for us to see how you get an inflationary picture out of that.
CAYMAN CAPTIVE 45
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