1-on-1 With Michael Hasenstab: Market Changes and Challenges

Here are some highlights of Hasenstab’s views represented in the podcast:

  • I think we have had some pretty meaningful changes in terms of US policy in the last several months that should push forward what was already decent growth, but accelerated. We have a number of things coming together that are likely going to pull inflation higher.
  • In the United States, companies are trying to hire more people than they are able to find. So, ultimately, they are going to have to pay higher wages. This is all happening at the same time we have cut our labor supply. We have moved the supply curve in the wrong direction with pretty aggressive anti-immigration policies. And so, we are already starting to see some wage pressures.
  • The amount of volatility and the magnitude of the [equity market] selloff really didn’t reach a level that would trigger real economic impact. I think we are far away from that. It seemed pretty isolated and contained. I don’t think we should panic about the moves that have happened. What I do think it does indicate, though, is there is a lot of leverage that is being built up.
  • In emerging markets, we are looking for reform stories. We are quantifying and highlighting the governance in the policy framework and the social stability.
  • As long as growth is good in Europe, you probably don’t see any of its fault lines getting too critical. But the minute you have external shock or some sort of domestic shock, then I think the fault lines become very apparent and make coordinated policy work almost impossible.

The full transcript of the podcast follows.

Host/Richard Banks: Hello and welcome to Talking Markets with Franklin Templeton Investments: exclusive and unique insights from Franklin Templeton. I’m your host, Richard Banks. Dr. Michael Hasenstab, Executive Vice President and Chief Investment Officer of Templeton Global Macro at Franklin Templeton Investments breaks down what’s behind current market gyrations and looks ahead to longer-term concerns. Speaking with Dr. Hasenstab is Franklin Templeton’s Katie Klingensmith. Katie, take it away.

Katie Klingensmith: Let’s dive right in. We have a lot going on in the United States and I know it from your team you have still highlighted that there’s quite a bit of momentum in the US economy. What’s your outlook?

Michael Hasenstab: I think we have had some pretty meaningful changes in terms of [US] policy in the last several months that should push forward what was already decent growth, but accelerated. Probably the most important is actually the deregulation that has been aggressively pursued by this [US] administration, as well as by Congress. That was probably one of the big bottlenecks for investment and one of the reasons we haven’t had a lot of investment since the GFC [Global Financial Crisis]. This very burdensome regulation crossed a lot of sectors from financials to the health care sector and on. So I think that will be a significant boost to growth and it came at the same time with the [US] tax-cut changes and the repatriation. All of that I think is well-known and clearly positive. So you add those deregulation, tax changes on top of an economy that was doing pretty well and clearly, I think, the growth trajectory for the 2018 is pretty positive.

Katie Klingensmith: Could you give us a little more insight about tax reform? How much did that change your view of the US economy?

Michael Hasenstab: I think one of the things it did was increase the deficit, so we are going to have to borrow another $200 billion a year to pay for the tax cuts. Theoretically in 10 years’ time it’s revenue-neutral, but we all know that’s a little bit of an accounting gimmick and in the short-term it’s clearly going to create a larger deficit. That is happening at the same time as the Fed [Federal Reserve] is committed and announced that they will not be funding the deficit through their QE [Quantitative Easing] program. As bonds mature, they are not going to reinvest those at the same rate. There will be a phasing-out period, but certainly it is going to be phasing out. So you have higher deficits; you have the Fed which financed 25% of our deficit now going to be gone from the market. I think that is going to have a meaningful impact on the Treasury market. Plus, you are seeing signs inflation is beginning to accelerate. We have a very tight labor market which is only made tighter by the anti-immigration policies of this administration. All these things I think are coming together where you are going to see an acceleration of growth, but it is going to pull inflation higher and Treasury yields need to back up.