A Supply-Siders Investment Thesis
October 16, 2010
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“If you put the federal government in charge of the Sahara Desert, in 5 years there would be a shortage of sand.” ~Milton Friedman
Last week, I had the opportunity to attend a presentation titled “Around the World in 90 Days” by Dr. Victor Canto. Dr. Canto is the founder of LaJolla Economics and earned his Ph.D. in economics from the University of Chicago. He is very much a proponent of supply-side economics and in 1983 wrote The Foundations of Supply Side Economics.
It is from this Chicago school of thought that he made his presentation.
The presentation was divided into two sections; the first half covered his macro-economic outlook while the second covered his investment thesis based on this outlook.
- Slow domestic growth- Dr. Canto thinks we are in for a period of slower growth due to current government policies. He thinks the current government is focused on income redistribution and not promoting growth. He makes the point that even if you hold to a philosophy of redistribution you should focus on growing the size of the pie and not simply reassigning the pieces.
- Increased regulation – We are in for a period of increased regulation which according to Dr. Canto will serve as a harness on growth. He is very much a fan of limited government as evidenced by the above Milton Friedman quote he shared.
- US should decrease its debt – Dr. Canto believes the growth in US debt is not sustainable and the focus should be on paying down the debt. He proposes to limit the growth of government to the rate of inflation. Any real growth (GDP growth in excess of inflation) should be used to reduce the deficit and ultimately pay down the debt. He offers what Canada did in the mid-nineties as an example.
- Inflation – We will see inflation one way or the other. Either banks will start lending, the money multiplier increases and the Fed will not be able to tighten quickly enough or the Fed continues its QE policies resulting in a devalued dollar and we end up importing inflation.
- Emerging Economies – Will continue to see growth and outperform the developed economies.
- Small-caps – Due to slower growth and higher regulation, Dr. Canto is looking for small-cap stocks to outperform large-caps. His thesis is that small-caps will either be explicitly exempted from much of the forthcoming regulation or that many are small and nimble enough to work around and avoid new regulation.
- Inflation – Investors should have an inflation hedge in place. He did not list specifics, although he did say he did not like TIPS unless they are in a tax-shield account.
- Emerging economies – He suggested a 25% allocation to emerging economies. Says the way to play China is to invest in Brazil. Brazil has what China needs with a better establish legal system.
While I did not agree with all of Dr. Canto’s conclusions it was an interesting presentation and provides good food for thought.