Robb Arnott interview at Kingworld News (12/26/10):

My notes from listening to this interview but you may want to listen yourself so have provided the link below.

{What a resume he boasts – manages over $65 b and sub advises Schwab’s mutual funds and PIMCO’s asset funds. Plus many more accolades as found on the Kingworld site. Me thinks this guy might know a thing or two!}

· What surprised him most about 2010 was the resiliency of the US economy which he expected to go instead into a recession

· Thinks we could get significant inflation in 2011 or lapse into a recession with a 50/50 possibility of a recession. Recession remains a very serious risk until we get a more rational financial policy which has more respect for the crucial role that private sector plays in producing something useful.

· It is foolish to think that consumption equates to prosperity but that’s what our Administration believes. This is not prosperity but over spending on borrowed resources.

· He says that if he’s wrong, if the QE and tax relief allows us to struggle our way out of recession….if that happens then we are looking at an imminent risk of inflation in 2011. This means that people should start building inflation hedges into their portfolio now if you have not already done so.

· In 2011 we will have either renewed recession or renewed inflation – either of which is not positive.

· His big theme is to build in “inflation hedges” to one’s portfolio. His clients are resistant to this “fringe approach.” Typical investor has 90% or so investment in general equities which currently trade north of 20 times their earnings. Market is richly priced. Why this premium when prospects for growth are not that great? Headwinds prevalent to include the demographics. Yet markets are priced at premium multiples.

· People are leery about moving the bulk of their money away from the stock market. But at a minimum you can buy more of the deep discounted stocks and short those trading at premium multiples. You want to go long those stocks out of favor as this is where the risk premium is.

· It would not shock him if there was a 20-30% correction. The stock market is not priced to reflect any kind of recession. He thinks there’s more than a 50% chance of a correction given his take on the recession front. The latest bull/bear statistics show that bullish feeling in both the institutional and retail community is near historic danger zone, near the peak in 2007. It is scary as if everyone is buying where is the new buying going to come from?

· Is this going to be a massive wealth transfer from those stuck in the paper game? Yes he thinks it will. The ones willing to look outside of mainstream will be the beneficiaries. Current policies are starving society of jobs that matter. Replacing it with “make work” jobs that really don’t create anything of value….just look at the growth of government jobs versus private sector.

· Looks at current situation with alarm. It is not just one party’s problem, it is both. Focus is on growing government to the detriment of the private sector. Problems are being created on a bi-partisan basis.

· Debt to GDP in US is truly breath taking. We will not be able to pay it off. Instead it is how do we selectively default without causing geopolitical risks. 2/3rds of debt is unfunded social security & medicare. Our generation made huge promises to ourselves without prefunding it. Our kids and grandkids will sensibly say that since we did not prefund it we now need to fund it…how? By decisions that those with income will not qualify for social security and then eventually those with assets will not qualify.

· The real issue for US will be what’s the path to default without creating geopolitical instability.

· Themes for 2011 - Look outside of mainstream stocks and bonds. Emerging markets don’t necessarily face the same deficit/ demographic challenges the US does with the exception of Russia and Eastern Europe. When markets are expensive like they are now, you need to look at the emerging markets for their bonds and stocks, more notably the bonds. Look at commodities on dips. If we go into recession there will be dips and thus buying opportunities. Also high yield bonds are better bets than long term Treasures.

· Bottom line there is and will be opportunities in the next couple of years. Unfortunately most people will trust “a policy elite that is absolutely clueless.” This will result in a transfer of wealth.

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/12/28_Rob_Arnott.html