David Kotok, co-founder and chief investment officer of Cumberland Advisors, is “very worried” about the global economy. More specifically, says Kotok, he’s worried about “massive instability that’s brewing” among the world’s four largest economies.
He explained these concerns to ThinkAdvisor at this week’s Inside ETFs conference.
In the U.S., the world’s largest economy, the newly elected president is moving away from free trade policies, abandoning the trans-Pacific trading partnership and threatening large tariffs against China, the world’s second largest economy, and Mexico.
China is not a free-trade champion and could retaliate against the U.S. if it imposes tariffs on Chinese goods.
Japan, the world’s third largest economy, is feuding with China over the territory of several islands in the East China Sea and it is using fiscal stimulus to build up its defenses against China and maintaining zero to negative interest rates to boost a moribund economy.
The eurozone, the world’s fourth largest economic region, continues to try to revive its economies with low to negative interest rates and central bank bond purchases.
As a result of these macro concerns, Kotok told ThinkAdvisor he’s now holding large quantities of cash in portfolios: 40% cash in core portfolio and 27% in U.S. portfolios — both much higher than usual.
On the stage at the ETF conference, Kotok told moderator Matt Hogan, CEO of Inside ETFs, that after the election of Donald Trump as president, he sharply reduced stock allocations while increasing bond and cash holdings.
When asked for his thoughts on the Fed, Kotok said the future independence of the Fed under President Trump is the “$64 trillion question, and a serious one.”
Trump will likely be appointing the majority of members of the Board of Governors of the Fed during his term, explained Kotok. There are already two vacancies to fill plus two crucial appointments likely next year when the terms of Chair Janet Yellen and Vice Chair Stanley Fisher, both in their 70s, end.
“The Fed’s independence has enabled it to intervene when the world economy froze,” said Kotok, asking, will it be able to do that if its independence is jeopardized?
The Fed plays another important role, one especially important for financial markets. “Everything we do compares returns to the riskless rates of Treasuries. “That’s critically important to every investor,” said Kotok. That riskless rate is usually the rate on the 3-month Treasury bill, which is essentially set by the Fed’s monetary policy.
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