My Blog
Rob Arnott - “In Worst Depression Since The Great Depression”
With continued volatility in all the markets, King World News interviewed five time Graham & Dodd Award Winner, Rob Arnott, who oversees more than $80 billion as the Founder & Chairman of Research Affiliates. Rob sub advises the Pimco All Asset Fund and mutual funds and ETFs for Schwab, Powershares and Nomura. When asked about what he sees happening with stocks and the economy going forward, Arnott stated, “When real interest rates are 2%-4% and inflation rates are 2%-4% you get a really nice peak where the average P/E ratio is north of 25 times earnings. The interesting thing is both of these numbers are within the control of the Fed, the Fed can control the rate of inflation and tacitly can therefore control the real rate of interest. ”
© 2011 by King World News®. All Rights Reserved. This material may not be published, broadcast,
rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
September 22, 2011
Rob Arnott continues:
Where are we now? We have negative real interest rates. Okay, that’s pretty alarming. We also have inflation rates (if) correctly accounted, probably in the 5%-7% range. If inflation kicks up another 1% or 2%...This creates some fairly serious downside risk for equities if the Fed continues on it’s current path.
Unfortunately I think they will. Unfortunately enabling bad behavior is what they do to try to avoid an economic downturn. Well, the downturn is already here. Absent deficit spending, we’re already mired in the worst depression since the Great Depression.”
When asked about the proposed stimulus package Arnott remarked, “Let me postulate another idea entirely, Milton Freidman 50 years ago suggested that the right way to deal with poverty is a negative tax. As an example, you have somebody who barely managed to graduate from high school, lousy grades, no job experience, no job skills, how is that person going to get a job? Well, (simple hypothetical example) if an employer is allowed to hire him for a buck an hour, he’ll get a job, but if an employer is required to pay them $8.00 an hour, they won’t.
You wind up with a person basically being told that you’re unemployable now, we unfortunately have to leave you in that situation and that means the American dream is not for you. The other scenario is you say, you know your market clearing price is pretty low right now, it’s a buck an hour. So we’re going to hire you for a buck an hour and we’ll pay you a negative income tax of $7.00 bucks an hour, so you’re making $8.00. Is the employee going to care whether the eight bucks comes from the employer or largely from the government? Of course not.
Now what’s interesting is the share of the adult male population that was working back in the 50’s got as high as 93%, that’s pretty amazing, right now it’s 75%. That means we don’t have 9% unemployment we have 18% among men relative to the share that once worked. The largest share of the female adult population that worked was 72%, it’s now 64%. Okay, that’s pretty bad.
If you do the math and you say that (of the adult working age population) 93% of men could work, 72% of women could work, would work if they had nice job opportunities.
That means you’ve got 30 million people unemployed. Let’s take that negative income tax example, multiply it by 30 million people. The total cost of putting those 30 million people to work would be smaller than the 450 billion dollar stimulus that was proposed.
So do we want to put a few hundred thousand to work or do we want to put 30 million to work? It seems to me that shifting our mindset to embrace negative income tax is a politically unacceptable answer, but it’s the right answer.”
Rob is one of the brilliant original thinkers in the financial world and he is warning investors to expect tremendous inflation going forward. What that means is investors will have to protect themselves by owning real money, gold and silver. In his interview he discusses where he sees things headed for the US and Europe, inflation and more. Rob Arnott’s audio is available now and you can listen to it by CLICKING HERE.
© 2011 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
Eric King
