In this in-depth interview with financial analyst Brian Pretti, he explains from an institutional money perspective the factors driving the stock market higher and why valuations may get far more stretched as sovereign wealth funds, pension funds, and global capital desperately seek return in an environment devoid of many options.
Here we present some brief excerpts from his interview airing Friday for subscribers.
On how the Great Rotation is playing out among individuals and institutions:
"[Rebalancing] is the toughest thing to do for so many individual investors…do you really jump in whole-hog here and say, “Well, I’m going to take my entire retirement fund balance out of the bond market and put it right into stocks after a 150% move.” That’s a tough one. That’s very tough to do psychologically, so that interim clearly would be something like a money market fund or a bank account as you assess the landscape ahead."
"The toughest part about this, and this is really a global issue more than not: where does all this global capital go? And now that the sovereign debt markets are starting to leak—they’re starting to deteriorate—you have HUGE amounts of capital in the sovereign debt markets—I mean HUGE—that just dwarfs the money that’s in the equity markets…it may be, and I know this sounds wild, wonderful Mr. Bernanke told us three or four years ago that he wanted stock markets up and he wanted the housing market up; well, he may get his wish in spades here because clearly that’s what we’re seeing this year."
On long-term valuations versus liquidity and trend:
"It’s my greatest fear that as we narrow down these asset class choices and really not even with domestic capital, but with the weight and magnitude of global capital that really has nowhere else to go for any kind of rate of return—and even though you and I as individuals can sit here and say, “We’re just not going to participate in a market like this. We’re just not going to participate in a market where the Fed has distorted the fixed income or equity side of the equation.” But, for institutions, they just don’t have that choice. And for folks like pension funds, they don’t have that choice. And I especially worry about that pension fund side because…fixed income isn’t working for them anymore. Not only is it not working, but it’s becoming a drag. What do you do when you are wildly underfunded and you can’t get a rate of return? If I’m not incorrect, I believe the numbers for CALPERS last year were less than 1%! In a world when the S&P was up 15%, how do you look that in the eye, with an 8 or 7 ¾ percent actuarial rate of return assumption and say, “Well, we’re going to work our way out of this over the next several years.” You are forced [into the stock market]! And that’s exactly what Bernanke wanted. He wanted to herd all the cats into equities and real estate and here it is. So, the real issue is, as we look forward into the next year, where does all this capital go? When we see things like the bond funds being liquidated and the money move into cash—there’s still a lot of cash out there. Or, let’s call them cash-equivalents—whether they be really short-term, ultra-short bond funds or whatever they may be—but the longer this goes on where the broad spectrum of asset classes does not have positive nominal rates of return, it absolutely forces institutional capital into that last one asset-class that’s performing. And, Jim, we could absolutely be facing something like that ahead where it’s not a crash—it’s a crash up, not down."
If you'd like to listen to this entire interview airing Friday as Brian Pretti and Jim Puplava discuss the global financial landscape, you can do so by clicking here to subscribe. In addition to hearing from other money managers, institutional investors, and analysts regularly interviewed for FS Insiders, you’ll also gain access to our entire archive of prior interviews.
