I am writing this week’s Perspectives on the road, in between meetings with clients in Australia and Asia, but by the time you read it, I will be back in the northeastern U.S., packed for my summer vacation. It is that time of year again, when we leave our desks to recharge our batteries and catch up on some of the books we’ve been meaning to read.
Last summer, I hit the beach with War and Peace and its lessons about humility in the face of uncertainty. This year, my summer reading has been a double helping of Walter Isaacson—I have finished his book on Albert Einstein and am now enjoying his new biography of Leonardo da Vinci.
Both of these revolutionizing geniuses worked outside the intellectual mainstream, were unafraid to challenge received wisdom and saw the value of pursuing a range of disciplines, allowing them to spark off one another. Leonardo, the archetypal Renaissance Man, painted the human form so strikingly because of his studies of anatomy, engineering and optics, not despite them.
Isaacson is drawn to this profile and has explored it in biographies of Benjamin Franklin, Steve Jobs and others. He sees their disdain for convention and their boundless curiosity as the source of some of the most powerfully transformative creative thinking in human history.
It reminds me that unconventional thinking often succeeds because the world doesn’t always work conventionally, and that the things we do away from the office—whether it’s unwinding with a book, seeing a new part of the world, tinkering with our hobbies or just spending time with our thoughts—can help us to think differently about challenges in our work.
Cycles Do Not Die of Old Age
We have often noted that a key challenge investors face is deciding where we are in the current business cycle.
Read the financial pages and you see how conventional it is to fret about the end of the cycle, simply because it has already lasted quite a long time. But let’s change the perspective. Recall that I am writing in Australia: There hasn’t been a technical recession here for 27 years. The Netherlands managed a similar feat between 1982 and 2008.
Australia reminds us that business cycles do not just die of old age. They need a catalyst. In earlier years of this cycle, the concern was that it would not achieve escape velocity and we would fall back into recession. Today, we are concerned about the more usual catalyst for the end of a cycle—overheating.
The conventional indicators of overheating suggest that this cycle has two or three years yet to run. Labor markets in both the U.S. and Europe are tight, but wage inflation remains modest. The second-quarter earnings season showed that corporate profits do not appear to have peaked yet. Debt levels are undeniably high, but the repayment problems that have often come before a downturn are nowhere to be seen. Capex is rising, but after a long period of underinvestment that is far from a wave of hot money financing white elephants—note that the first quarter of this year set a record for share buybacks in the S&P 500. Even the flat yield curve says more to us about our peculiar post-quantitative easing moment than it does about central banks dousing the engine room.
Ask the Unconventional Questions
But let’s change the perspective again. If the conventional indicators tell us that the business cycle has two or three more years to run, is there something unconventional that might curtail it or extend it?
Overheating could certainly result from the inordinate amount of stimulus being applied to the U.S. economy, which is highly unusual for this mature stage in a cycle and may therefore be outside the conventional models for recession forecasting. The same goes for the potentially inflationary effects of a major trade conflict coming after decades of globalization.
It follows that some kind of cooling mechanism could extend the cycle. Improved productivity as corporate investment recovers is a potential candidate, as is a successful normalization of monetary policy that curbs inflation without shutting down the growth engine.
Step back, and what we are looking at are the conventional “pressure gauges” of inflation, interest rates and currencies. But as we do so, we are aware that the pressure itself, or the safety valve that releases it, could be unconventional.
A spell on the beach, away from the boxed-in thinking of analysts’ reports and the business headlines, can help us turn over these possibilities in our minds. If that time is spent in the company of unconventional thinkers such as Einstein or Leonardo, so much the better.
Erik Knutzen, CFA, CAIA and Managing Director, is Co-Head of the Neuberger Berman Quantitative and Multi-Asset Class investment team and Multi-Asset Class Chief Investment Officer. Erik joined in 2014 and is responsible for leading the management of multi-asset portfolios, driving the asset allocation process on a firm-wide level, as well as engaging with clients on strategic partnerships and multi-asset class and quantitative solutions. To learn more, see Mr. Knutzen’s bio or visit www.nb.com.
In Case You Missed It
- U.S. Producer Price Index: Unchanged in July month-over-month and +3.3% year-over-year
- Japan 2Q 2018 GDP (first estimate): +1.9% annualized rate
- U.S. Consumer Price Index: +0.2% in July month-over-month and +2.9% year-over-year (core CPI increased 0.2% month-over-month and 2.4% year-over-year)
What to Watch For
- Tuesday, 8/14:
- Euro Zone 2Q 2018 GDP (first estimate)
- Wednesday, 8/15:
- U.S. Retail Sales
- NAHB Housing Market Index
- Thursday, 8/16:
- U.S. Housing Starts and Building Permits
Statistics on the Current State of the Market – as of August 10, 2018
|S&P 500 Index||-0.2%||0.7%||7.2%|
|Russell 1000 Index||-0.1%||0.8%||7.3%|
|Russell 1000 Growth Index||0.3%||1.9%||12.5%|
|Russell 1000 Value Index||-0.5%||-0.2%||1.9%|
|Russell 2000 Index||0.8%||1.0%||10.6%|
|MSCI World Index||-0.6%||-0.5%||3.4%|
|MSCI EAFE Index||-1.5%||-2.6%||-2.6%|
|MSCI Emerging Markets Index||-1.0%||-2.2%||-6.5%|
|STOXX Europe 600||-2.1%||-3.6%||-3.4%|
|FTSE 100 Index||0.6%||-0.5%||2.7%|
|CSI 300 Index||2.8%||-3.1%||-13.9%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||0.2%||0.2%|
|Citigroup 10-Year Treasury Index||0.8%||0.9%||-2.5%|
|Bloomberg Barclays Municipal Bond Index||0.2%||0.1%||0.0%|
|Bloomberg Barclays US Aggregate Bond Index||0.4%||0.5%||-1.1%|
|Bloomberg Barclays Global Aggregate Index||-0.1%||-0.4%||-2.0%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.1%||0.2%||3.0%|
|ICE BofA Merrill Lynch U.S. High Yield Index||0.1%||0.3%||1.5%|
|ICE BofA Merrill Lynch Global High Yield Index||-0.4%||-0.6%||-0.7%|
|JP Morgan EMBI Global Diversified Index||-1.3%||-1.6%||-4.4%|
|JP Morgan GBI-EM Global Diversified Index||-3.5%||-4.0%||-8.5%|
|U.S. Dollar per British Pounds||-1.9%||-2.6%||-5.6%|
|U.S. Dollar per Euro||-1.4%||-2.3%||-4.8%|
|U.S. Dollar per Japanese Yen||0.4%||1.1%||1.7%|
|Real & Alternative Assets|
|Alerian MLP Index||2.2%||5.6%||11.8%|
|FTSE EPRA/NAREIT North America Index||-1.5%||-0.1%||2.2%|
|FTSE EPRA/NAREIT Global Index||-0.8%||-0.9%||-0.1%|
|Bloomberg Commodity Index||-0.7%||-1.3%||-3.4%|
|Gold (NYM $/ozt) Continuous Future||-0.3%||-1.2%||-6.9%|
|Crude Oil (NYM $/bbl) Continuous Future||-1.3%||-1.6%||11.9%|
Source: FactSet, Neuberger Berman.