Christine Benz: Hi, I'm Christine Benz for Morningstar. The markets have endured a steep sell-off during the past few weeks. Here to provide a perspective on recent market volatility is Nick Calamos. He is president of investments and chief investment officer for Calamos Investments. Nick, thanks so much for coming in.
Nick Calamos: My pleasure.
Benz: So, Nick, one thing the that the markets appear to be very concerned about is, slowing economic growth in developed markets, yet we've seen a big sell-off in growth equities. Why do you think there is that disconnect?
Calamos: Well growth equities get priced with kind of a compounding effect of growth just like an interest-rate compounding effect would occur, meaning that if interest rates compound out at 5% versus 10%, there is not a linear doubling of rates, they are differential. It's actually a compound effect. So, right now the markets are really concerned about whether or not we're going to grow as an economy, and growth stocks in general are being priced for much lower growth.
Benz: So is it your view that the sell-off has been overdone in some of the areas that you cover as a firm?
Calamos: Yeah, I think so. What we look at is what's the likely reaction from the government, and unfortunately we are in a marketplace today where government actions are dictating a lot of the direction for the economy, not the private sector. And it's likely in our mind that the Federal Reserve is the only policymaking arm right now that that could be effective because our Congress is kind of in a stalemate position and the solutions probably don't get addressed until after the next elections.
So with that said, it's likely that we start this reflation phase again, and historically when you have an asset bubble that's financed by the banks and it implodes, it's primarily credit that imploding here.
Benz: So you think it's a continuation of a long cycle dating back to 2007?
Calamos: Yes absolutely. There is a great history of this that will tell you it's a very long cycle. You won't tell from quarter to quarter if you are growing or not growing. Some quarters it's going to feel very strong, but the next quarter is going to feel very weak. That's basically what we've been in. And the solution to this is inflation, defaults, devaluation in the currency, and financial repression meaning keeping interest rates very low for an extended period of time. That's how every other one of these cycles has played out.
Benz: So how much longer do you think we have to go?
Calamos: I do not know the answer to that. We have to find a bottom in the housing market. The banks have to clear a lot of these weak loans, so the banks have to stand on their own, not just in the U.S., but in Europe also. And probably the next phase is we have some excess capacity in this country, and that capacity has to be worked down. So, it's likely another three, four, or five years of a relatively stagnant economy. The good news is U.S. companies have found growth overseas. The last time we were in this type of scenario was the 1930s.
The big difference though was in the '30s, emerging economies were also imploding and had too much debt.
This time around the emerging economies came into this cycle with very strong balance sheets. Most of them had strong current account positions and what we would say is a underutilized consumer class that's going to step up. So the good news is those economies are growing. They are 50% of global gross domestic product, and they should be strong enough to pull us all out of a global depression scenario into much more of a normal business cycle, just an extended one.
Benz: So, can you give an example of U.S. firm that has managed to find growth overseas?
Calamos: Not just U.S., European also and Japanese. So in our portfolios, Intel is a firm that's definitely benefiting from global growth; outside the U.S., Coca-Cola of course; Siemens in Germany; maybe Canon in Japan. So the developed markets are in a very strong position to benefit from global growth.
And if you look at corporate earnings right now, more than 50% of corporate earnings are coming from overseas in the S&P 500, and those margins are higher than margins in this country also. So that's really why corporate profitability and earnings can grow quicker than our economy.
Benz: Right. So when you look at emerging markets, which I think there is almost universal consensus that that will be an area that will be able to grow strongly over the decades ahead, are you concerned that there is a little bit of a bubble forming around emerging markets, that people are overly optimistic and that we will set ourselves up for one of those boom-and-bust cycles that we've seen so often in emerging markets?
Calamos: Christine, I think that's absolutely correct. We are in a period where we're keeping interest rates very low, and a policy of low interest rates tends to create bubbles somewhere. So there is a misallocation of capital that will occur. Since the story is so good in emerging markets, that a likely place; commodities are also likely place to see that happen. But I don't think we're even close to that right now. We will watch for it.
Today, you have P/E ratios in emerging economies, and there's quite a few that are sub-10. So, that's nowhere near a bubble-like market yet. But it is a small marketplace in general, meaning that it doesn't take a lot to push it into a bubble area pretty quickly. So that will happen probably at some point, but we're not there.