Watch: CPLIX’s Michael Grant Anticipates a Radically Different Decade

The world has changed, and the challenge for financial advisors in the next decade will be how and where to find income and risk-managed opportunities. Today we release a series of videos featuring the perspectives of Michael Grant, Co-CIO, Senior Co-Portfolio Manager of Calamos Phineus Long/Short Fund (CPLIX).

Are We Nearing a Regime Change?

While the 2010s bull market for all risk assets has been the result of “excessively low interest rates” of central bankers, Grant believes the “decade-long reliance upon excessive monetary activism” is climaxing.

What favored growth momentum and outperformance by disruptors (i.e., those who “establish a market position before monetizing it”) may in the coming years transition to a dramatically different investment regime, says Grant. Value-style stocks, including dividend-yielding traditional businesses, could be the beneficiaries.

Grant paints a possible picture of the next decade: “The surprise could be higher rather than lower interest rates, assuming policymakers can achieve their objectives. These non-monetary tools will include fiscal policy, tariffs and trade policy, currency intervention and new ideologies such as Modern Monetary Theory.”

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Regime Change Will Reflect Regional Economic Blocs, Demographic Differences

“Investors face a radically different landscape that demands a rethink of the global investment approach,” Grant says.

Demographics and new technologies played a decisive role in the disinflationary forces of recent decades and in inspiring populism, according to Grant, who says there’s a reversal underway—a “new digital Cold War.”

“Global supply chains are giving way to more regionalized trading blocs built around different technology and regulatory standards and eventually, separate monetary cycles,” he says.

In reviewing the demographics trends that could disadvantage Europe and China, Grant explains how the U.S. millennial generation will likely lead a consumer revival. “The U.S. economy,” he says, “could be a virtual island of reflation, while policymakers seek to limit the impact of weak demand abroad.”

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How Will the Debt Bubble Be Resolved?

In this video, Grant comments on debt resolution in the 2020s. “Debt cycles are common through history. The critical question is not if they are resolved, but how. The ‘how’ ultimately rests on which segment of society absorbs the cost of wiping out the debt. This is as much a political and social debate as an economic one,” he says.

Grant discusses four possible ways of resolving the global debt bubble.

• Cheap refinancing, which has been the norm for the past decade. Such policies have been “short-lived and increasingly ineffective and unpopular as they aggravate wealth inequalities,” he says.
• Lengthy period of repayment, with less spending and rising savings rates or, alternatively, a setting of default and debt liquidation. Both approaches would be disruptive and disappointing, according to Grant. “Both are unlikely amidst rising populism, where the burdens have already fallen harshly on the ‘average consumer.’”
• Stronger nominal economic growth and higher inflation, described by Grant as “the least bad choice” for reducing leverage. “The world needs higher nominal growth to address global leverage. It needs higher inflation and it just might get it as fiscal policy dominates monetary policy,” says Grant.

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It’s the End of One-Way Markets

Markets go two ways, Grant notes—and predicts that the 2020s will remind investors of that.

Having benefited from effective capital subsidization in the years since the Great Financial Crisis, investors now need to come to terms with the exhaustion of monetary policy and the end of what he calls central bank supremacy.

Fear of policy failure is gaining ground, he says, and with it consequences for social and political fragmentation. “One glaring example of this is $17 trillion of negative yielding bonds. To put into perspective, this compares to $12 trillion in U.S. mortgages at the peak of the 2008 housing bubble and $4.5 trillion in technology companies at the peak of the .com bubble in 2000.”

What’s ahead, according to Grant, is more cyclicality and volatility as “policymakers in the West will take investors into new, unexplored territory led by non-monetary tools…The search for income remains a priority, but protection of capital will be equally paramount in coming years.”

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The Search for Income May Lead to Equities, Not Bonds

Grant comments on the upside down world where equities can yield more than bonds and, in some cases, bonds offer negative yields and are guaranteed to lose capital. He specifically comments on the European dilemma and the apparent inevitability of higher price volatility.

While acknowledging the risk to invested capital in equities vis-à-vis bonds, Grant suggests that investors seeking income in equities could outperform bonds in both upside and downside scenarios over the next 10 years.

Using Europe as an example, “dividends have comprised about one-half of an investor’s total return due to the underperformance of those markets in the post-2008 era. In other words, the value of client portfolios was 40% higher as a consequence of dividends,” he says.

Because central bank intervention has altered the roles of equity and fixed income in a balanced portfolio, Grant says investors will need a more active, selective and risk-adjusted approach across asset classes in the next decade.

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Financial advisors, for more from Grant or how he’s positioning CPLIX for the next decade, talk to a Calamos Investment Consultant, call 888-571-2567 or email caminfo@calamos.com.