Global Market Outlook and Why You Shouldn’t Diversify

Our outlook for the global economy and case for why investors should not diversify.


Robert Zuccaro, Founder & CIO of Golden Eagle Strategies, shares his take on the global economic landscape. Robert is a quant pioneer driven by a never-ending pursuit to identify the common threads of top-performing stocks in pursuit of superior performance. He is also a prolific writer and author of the book How Wall Street Reshaped America’s Destiny.

Today, we share our outlook for the global economy and make a case for why investors should not diversify.

On the economy, S&P Global has a forecast where worldwide economic activity, as measured by gross domestic product, will contract by 0.5%. Another forecast by the OPEC countries, and I think there's like 21 of them. And Russia is not OPEC but it's quasi-OPEC. They're expecting economic growth of 2.5% next year. How much do you think the economy will grownext year? Which forecast do you think is closer to reality? Minus 0.5 or positive 2.5?

I would say probabilities favor negative growth for these reasons: we have higher interest rates throughout the world, and I don't see how Europe can grow. If you look at the developing countries throughout the world, they have a very serious problem. First of all, they have over-leveraged themselves on the heels of Covid 19. And secondly, they are more impacted by food inflation than more affluent nations. In the United States, we spend 10% of our disposable income on food. In developing countries, of which there are about 45 of them, they spend 45%. Food inflation continues to escalate. That's not going to change anytime soon. If you look at the US economy, we have $31 trillion in debt. Our interest costs are the fastest growing budget item, and on an annualized basis as of last month, they amount to about one $1 trillion a year. So, the relationship between $1 of debt service and GDP growth is 1 to 31.

The emerging economies have 11 trillion in debt and their servicing costs of $4 trillion. The relationship there is faraway from $1 of debt service to $31 of total debt. It’s one to four. So I think economic growth is going to be muted next year, but it's not necessarily bad for the stock market. I have argued for some time - 20 years ago there was a thesis about everybody should have greater diversification in their portfolio, and you should own a fair amount of emerging market stocks. Over the past 15years, S&P 500 has gone up 353%. And EEMs, which is an emerging market ETF, has gone up 85%.

If anything, the outlook for the rest of the world is less robust than it has been in the past. I'm one of the few individuals in the investment business that will argue against diversification. And my approach really is that If you're going to invest, you should invest to make the most amount of money, you know, which means aggressive growth. And if you diversify, basically what you're going to do is lose the way of opportunity costs, because you're going to shy away from more promising investments that are called so risky, and you're going to have less exposure. And at the end of the term, you're going to have less money.

All right let's take a look at the federal reserve. Until two months ago, they were going to raise the discount rate. Does anybody recall what the discount rate is? Borrowing directly from the Fed. The other way banks can borrow money in order to shore up the reserves is to borrow from each other, and that is called the fed funds rate. Because the Fed funds rate is not backed by the full faith and credit of the federal government, the funds rate tends to be higher, so typically banks will go to the discount window before they start pulling down loans from each other.

But the Fed has raised its outlook for the discount rate next year from a previous 3.75% to 4.6%. Now, the Fed got in trouble about a year and a half ago because they did not read the tea leaves correctly, and they did not regard is inflation being a problem. I think they made a mistake a year ago. I think they're running the risk of making another mistake because when you raise interest rates, it's assumed that the impact of the rate increase will not be felt for 12 to 15 months. And because you can't see it very readily, you tend to have an attitude of instant gratification, and because you can't see it, you continue to raise interest rates more than enough in order to reign in economic activity. And instead of having a recession, you'll end up in a severe recession.

So right now, they seem to be on a very hawkish path and, I think the best thing, the Fed chairman is Lee Brader. She's vice chair and she's concerned about raising rates too much. And I think at the next meeting, the final meeting for this year in November, that she may prevail.  And I think if the Fed only raises rates by 50basis points instead of the assumed 75, we have a Santa Claus rally allowing a stock market to finish higher at year end then at the point at which it was trading on June 30th. I think that's a distinct possibility.

Bank of America just released a report indicating high inflation for the next 10 years. I tend to agree with that. In terms of the inflationary outlook, the green movement is only stoking inflation. Before the current administration in 2019, the United States was a net exporter of oil. In 2021, we were a net importer of oil. If you look at the domestic oil industry today, investment has collapsed which means we are not going to have any greater supply than we do now. Each year, the demand for oil tends to increase, aside from cyclical influences, so as we go forward, the demand will increase. The supply will remain the same. The inevitable result of that is higher prices.

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This transcript was generated by software and may not accurately reflect exactly what was said.

Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offeror a solicitation of an offer for investment.

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Global Market Outlook and Why You Shouldn’t Diversify

Our outlook for the global economy and case for why investors should not diversify.

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