Wolfgang Demisch is an independent investor who recently closed his consulting firm, Demisch Associates. Previously, he was a managing director with investment banking firm Wasserstein Perella after heading U.S. equity research at UBS, following stints at Morgan Stanley, First Boston, and Smith Barney.
Harlan Levy: What do you think of the fiscal cliff situation, and do you think Congress will let the country go over it?
W.D.: There is no fiscal cliff. The fiscal cliff is entirely self-induced. It's an artifact of Congressional decision-making in which Congress became entirely ineffectual. Congress can tie itself into knots as much as it wants to, but as we proved when Newt Gingrich stopped government funding, the government kept going. There are lots of tools to do that, and I think that will continue to be the case with lots of headlines in between.
If we reach the end of the year when push comes to shove, Congress will not be willing to hand out pink slips by the bucketful. So there will be an adjustment. How it comes about and how it will be presented to the public, I don't know. But there's too much recognition by Congress that it would be self-defeating, to put it mildly, for Congress to be so enthralled with ideology that it would cut off its nose to spite its face. There will be a work-around found sometime around the last minute, or just after the pink slips start to go out.
H.L.: What do see happening to the U.S. economy?
W.D.: If history is any guide, it will be a messy muddle-through, and I think there will be higher taxes on higher incomes and increased government spending, but I don't think it will lead to dramatically accelerated economic growth.
The hang-up with getting accelerated economic growth is that we really have internationalized our economy so much that the historic stimulus leaders really impact the global economy more than the domestic economy. If you look at Black Friday spending, for instance, other than the cut that retail takes on that, most of it is on imported goods, so how does that create jobs in this country and revenues to stimulate the economy? It's creating revenues all right, but mostly in China.
The only things that create domestic revenues right now are government service jobs and construction jobs and to a lesser extent, military spending, because that's domestically sourced. As for construction and government service jobs like homeland security and health care, of course the concern is that most of those jobs don't do a whole lot in terms of productivity. So that doesn't help much for economic growth. People don't get a whole lot wealthier from homeland security and nursing home jobs.
It's a difficult task, and I don't think that right now anybody has a good idea how to stimulate economic growth. Europe has basically had a hard time doing it for more than 10 years, and the engine they had in places such as Spain -- where it was construction and vacation homes and so on -- that business has basically stalled. So you have a horrendous economic slump, which governments right now are at their wits end as to how to end, and, relatively speaking, the U.S. is doing better, but it's still nowhere near how we were doing in the 1950s, '60s, or '70s, when we were growing at 3 to 4 percent, and per-capita wages were rising steadily. Those wages stopped rising in the U.S. when Nixon took office in 1970. Since then they're down considerably, like 25 to 30 percent.
H.L.: What do you predict for economic growth?
W.D.: We're getting past the point of massive write-downs from the real estate bubble. So if the write-offs end, the overall activity ought to be improving, and I'm reasonably cheerful that the overall economy will maintain modest growth -- 1 to 2 percent a year. It isn't going to feel all that good, but it's really hard to get to higher percentages because most of the places where there's real productivity is in manufacturing and agriculture. Agriculture is 1 or 2 percent of national employment, and manufacturing is somewhere around 10 or 12. That means that even if those sectors do well, they get drowned by the 80 to 85 percent that's just doing what they did yesterday.
If there was a way to multiply the productivity of the service sector by really injecting it aggressively with technology, that would be a transformation for the economy, but that's a process in its very early stages. The government is trying to stimulate the use of electronics in things like patient records. The police are trying to introduce electronics to substitute for people in things like surveillance, and all of these techniques, on the one hand, improve productivity. The doctor has your entire profile. On the other hand, the police can track down whoever committed a crime, but there goes your privacy. The question is if you're comfortable living in a society wrestling with those types of concerns. In the meantime, we're stuck with slower growth than we might have.
Also, if you look at it from a 50,000-foot perspective, one could honestly ask if the country is getting value for the money it's spending, the $2.5 trillion or so that we're spending on the federal level. It isn't like the roads are in spectacular shape, or that the air travel experience is wonderful, or that the national health care system is working without a glitch. There's the possibility of lots and lots of improvement everywhere you look, from healthcare to education to environment to security to international affairs. There are tremendous amounts of open items and unsatisfactory situations. It would be helpful if Congress and the executive branch could focus on solving some of those problems rather than on going through self-imposed torture on what the budget should be. How can you take seriously a budget which is 40 percent in deficit? That's hogwash. These are wartime levels of deficit.
H.L.: How have low interest rates and easy credit affected the aerospace sector?
W.D.: As a result of the Federal Reserve's easy credit and quantitative easing, which has kept interest rates very low and force-fed liquidity to financial markets, there is abundant money available. This has led to an unprecedented surge in commercial aircraft sales, and even provided the financing to replace relatively recent equipment with slightly more modern models.
There's just been a tidal wave of orders. The idea that you would buy the A320 neo airplane -- the slightly improved version of the A320 aircraft -- or the Boeing 737 Max -- the re-engined version of the 737 -- to replace 10-year-old equipment which still has 20 years of service life in it is illustrative of how much money is available. Historically, you used your airplanes until they got old. And I would think the same calculus would be true of things like heavy duty trucks.
H.L.: What do you think of Germany's leadership in the European sovereign debt crisis?
W.D.: The European debt crisis reflects in many respects the perils of having too much money, which happened to Greece and Spain, among others. That in turn was because the German banks were the primary culprit, following closely by British, French, and Swiss banks as well, by basically taking the establishment of the euro as a license to abandon any sort of prudent banking. If you think that the U.S. had problems with bad loans, it's true in spades in Europe.
The problem now is that there's an enormous overhang of bad debts, which thus far, the political leadership has been unwilling to recognize. In order to avoid it, it's costing more and more money. You have loans that can't be repaid. So what they've done is to borrow money to pay for the interest on the loans you can't pay back. Most of the European banks, if you mark their assets to market, would be bankrupt, and the governments don't know what to do. What they're doing is basically printing money to make it seem as if things are OK.
In Germany printing money is considered dumb, so the government leaders don't want to admit to it, but they don't have any alternative. So Europe is gradually imposing austerity across the board to a point which is really threatening the social cohesion in countries like Spain and Greece, and others.
There's a desperate need for imaginative leadership to get people to look forward rather than to look backward, but I don't see it.
Germany is so damn inward-looking and self-centered and self-conscious. All you have to do is read the press to see they don't have a clue. Leadership suggests setting goals and a judicious mixture of carrots and sticks, and do you see any carrots and sticks from Germany? I don't think Europe is blessed with strong and imaginative leadership. Germany is preoccupied with internal issues, its Muslim minority, its pension issues for old age, and things like that, and everybody is afraid for their currency. The reality that most of the German banks are exposed to a tidal wave of questionable assets: I don't think that fact is a popular topic of discussion. Europe has a mess on its hands, and thus far has not addressed it, because the process is just daunting.
H.L.: Will the eurozone then fall apart?
W.D.: Some sort of euro restructuring at some stage is likely, but the European Union as a whole is still eminently salvageable. It's like in this country. The problems that they have are not problems that are insoluble, but it is a case that requires real leadership, and that's in short supply. I don't see any vision anyplace.
From an investor perspective, all of this is very well known, so you have to assume that it's completely discounted. So from here on out, there's at least as much possibility of happy surprises as the other way around. That's what investors are now trying to discern. In France, does the recent collapse of the opposition give Prime Minister Hollande cover to do more interesting things? He's shown the occasional glimpse of backbone, and maybe he'll show more.
In Germany, realistically, at the end of the day it's only money, and for the Germans as much as for anyone else in Europe, if the alternative is people being killed in demonstrations, then money won't matter. In that sense, Greece is very useful as the canary in the coal mine. How far can you push a body politic? In Spain, you have demonstrations as well and secession votes by Catalonia, which was in the civil war in the 1930s, which Hemingway wrote about.
I'm saying you're getting feedback telling you that you're approaching the limits of what is doable, and that will be reflected in the political process.
So the cheaper way to pay off all the bad debts is to devalue everything. But in Germany, there's a paranoia about doing that, with its bad experience with devaluation right after World War I and World II. So I don't think devaluation will be an easy road. You'll probably have write-offs, very, very large ones. In Greece right now, it's under discussion that creditors will be getting skinned by extended terms and lower interest rates, so they get around 20 cents on the dollar.
And I might add that some vulture funds are now looking at Greek debt. If things get cheap enough, there may be value.