Neel Kashkari, managing director and head of global equities with PIMCO, delivered the closing keynote address of the 2012 FPA Experience on Monday afternoon. Kashkari, who served as senior advisor to then-U.S. Treasury Secretary Henry Paulson and later as assistant treasury secretary overseeing the Troubled Asset Relief Program (TARP), clearly had his work cut out for him with his presentation, “The Economic, Political and Investment Outlook.”
He began by noting the four questions he would, in part, answer:
- Where did we come from (economically speaking)?
- Where are we now?
- What is the outlook?
- What does it mean for investors?
“Who could make a bad investment when we were going through the leveraged buyout of the U.S. economy through 30 years of adding debt?” he rhetorically asked. “We were all living large.”
Comparing debt with gaining weight, Kashkari noted that if you add enough weight the heart eventually gives out.
“We had a financial heart attack. We saved and stabilized the heart but we’re still laying on the gurney and we’re still obese.”
Investors, he noted, are beginning to pay down debt, as are businesses, yet government continues to add debt.
Moving on to the investment outlook, Kashkari said growth is not coming from the U.S., Europe or Japan, but rather from emerging markets. This poses problems for individual investors, as “we all display home bias.”
“It’s human nature; we’re all more comfortable investing in our own backyards. Developing countries and emerging markets used to be the basket cases and developed countries were stable; not anymore.”
The conundrum, he added, is that policymakers are trying to stimulate the economy by encouraging individuals to once again take on more debt.
“They tried the homebuyers tax credit and the ‘cash-for-clunkers’ program, which was probably the worst economic policy in history,” Kashkari said. “I’d rather mention a few provocative pro-growth policies. If we can grow more, the debt-overhang becomes less burdensome for us all.”
He then specifically noted, “we want people to save and invest more, and then we tax investing and savings. Something like a consumption tax, by contrast, would be revenue neutral and would encourage saving and investing.”