Interview With Ben Inker, Asset Allocator at GMO
Weathtrack’s Consuelo Mack began her introduction of Ben Inker by commenting that no one knows how central bank’s experiments with new forms of monetary stimulus will turn out.
Mack pointed out that bond funds have had inflows for 17 consecutive quarters including the latest one ending March 31st, where inflows were over $72 billion. Actively managed bond funds continue to pull in significantly greater funds (by a factor of nearly 7) compared to bond ETFs.
Ben Inker is co-head of asset allocation at the money management firm Grantham, Mayo, van Otterloo (GMO). Inker characterized the current investment climate one in which investors have to work hard to find decent values. Even in Europe prices have been levitated due to suppressed interest rates, he said. The challenge is finding assets that are worth the risk you need to take right now, he added.
Inker said there has never been a time in history where interest rates have been so low throughout the world. Interest rates are being pushed lower by central bank action, as opposed to market forces keeping rates low, he clarified. Inker stated that central bank’s strategy of making risky assets more expensive is a dangerous game to play.
Inker indicated you can’t invest without worrying about what the Federal Reserve is doing because there will be repercussions on assets if and when they get the economy moving again. The economy getting on its feet again might wind up being a problem for investors with short-term interest rates being two percent below the inflation rate.
With unemployment being over seven percent, along with significant slack in the economy, price pressures aren’t evident yet, Inker explained. When capacity utilization increases and unemployment falls, all the money in the system could result in increased inflationary pressures, and rates could “rise in a sharp fashion,” Inker stated.
Inker explained the process which would lead to the Fed needing to raise interest rates over the inflation rate which would be a disaster for bond investors, and probably not very good for stock investors.
The interview (available below) continued with Inker commenting on the Bank of Japan’s extraordinary measures to increase inflationary expectations to two percent, GMO’s current equity allocation of 53% and the lack of attractive alternatives, techniques to add one or two percent above the rate of cash without taking too much risk, where equity assets are reasonably priced (high quality U. S. stocks such as Johnson & Johnson), attractive but riskier alternatives in continental Europe which have most of their business there (telecoms, utilities, etc.), the role of bonds in a portfolio, GMO’s expectations for corporate profits and economic growth, why stocks currently are better than bonds and cash, and the one investment Inker would recommend right now (high quality stocks).