January 25, 2013  BY Jennifer Liu

George Hersh, portfolio manager and political analyst at UMB

A video montage of media outlets recently speculating about the fiscal cliff drew KC Mathews to say that enough was enough.

“Stop with the sensationalism,” he said. “What we have now is not a doomsday sentence, but a place to find profit.”

Mathews is the chief investment officer for UMB Investment and Wealth Management. On Thursday evening, he gave a presentation at the Courtyard by Marriott hotel conference room assessing the current economic landscape. Joining Mathews was George Hersh Jr., portfolio manager and political analyst, and

The seminar, “Profiting from the Policy Basin,” debunked speculation of a fiscal cliff and instead demonstrated that the U.S. economy is in a position for slow and steady growth.

Mathews provided evidence addressing the elements that would prevent the 4 to 5 percent, or $400 to $700 billion, hit to the economy. According to the financial advisers, the following are signs that the U.S. economy will avoid full impact of a fiscal cliff:

  • Employment vs. unemployment rates to measure economic growth
    While recent figures of 7.8 percent unemployment rates show evidence to a slowing economy, Mathews said that job growth has steadily increased and remained stable. In 2012, 155,000 jobs were created nationally per month. He projected an increase of 20 percent in 2013 for the creation of 185,000 jobs per month.
  • Housing on the rise
    When housing supply increased and demand sharply decreased in 2006, the housing market took a toll on the economy.

KC Matthews, chief investment officer at UMB

“Now, the pendulum has swung back to demand,” Mathews said. “For the first time since 2006, housing prices year over year has increased consistently.”

He said that 780,000 houses were built in 2012 and projects that figure to increase to 1 million houses built in 2013. These construction projects will create jobs and boost confidence in home prices.

  • Growing consumer confidence
    According to Mathews, consumer confidence has been increasing since 2009 as evidenced by the state of job creation, housing market and stock market. He said there was a 70 percent correlation between corporate earnings and the stock market. Last year, corporate earnings were up 3 to 4 percent and Mathews expects to see earnings increase 6 to 8 percent in 2013.

While the fiscal cliff may not take full effect, the U.S. economy will still reel from the impact of the potential threat throughout the year. The financial advisers said that the low growth rate of 2 to 2.5 percent that the economy will experience in the “policy basin” is due to three main factors:

1. Ineffective monetary and fiscal policies
“Unfortunately, our politicians are more divided than ever before,” Hersh said about Congress’s control of fiscal policies. “This is a very fluid situation.”

Mathews warned that fiscal spending could derail the American economy if not addressed, particularly three main problems within the areas of social security, Medicare and Medicaid.

Eric Kelley, managing director for fixed income at UMB

Monetary policy and the Quantitative Easing method, with the ultimate goal of boosting consumer confidence and, in turn, the economy, has seen little yield. The Federal Reserve has succeeded in implementing an asset purchase program to buy bank bonds and decrease interest rates, pushing consumers to invest in other commodities like real estate and stocks. However, policies haven’t been able to address loan demand.

2. Growth challenges due to excessive debt levels
Unlike other recessions that have been followed by periods of growth to make up for lost economic output, the current economy has shown little sign of growth in excess since the most recent recession ended in 2009.

Kelley said that countries with 90 percent debt-to-GDP ratio struggle to grow at 2 percent. The total U.S. debt is now at 106% of GDP.

Another contributing factor is the recent explosive growth of student loan debt, which can be attributed to the rising cost of college tuition and a slow job market for recent graduates.

3. Demographics
Changes in family structures and population growth have led to an environment in which there is an increasing number of retirees and a slowing labor force.

To conclude, Hersh offered solutions in how to deal with the projected slow economic growth throughout the rest of 2013 with several actionable investment ideas:

a. Domestic large cap equities
These quality growth companies with strong balance sheets and solid growth provide rising profit growth, reasonable valuations and strong cash flow.

b. International/emerging markets
Mathews said they like the international markets because their fiscal and monetary cycles are different than those of the U.S.

c. High yield fixed income
With the federal interest rate artificially low, strong balance sheets continue to make corporate and high yield bonds attractive because of rising profit margins, which were up 15 to 20 percent in 2012, and liquidity. However, there is still the drawback of low interest coverage. 

d. Taxable municipal bonds
Kelley said that a taxable municipal bond is beneficial with improving fiscal conditions and attractive valuations.

e. Master limited partnerships (MLPs)
Hersh advised that with high yield and tax advantages, these investments in projects including pipelines and storage are uniquely positioned to take advantage of the energy boom in the U.S. today.

The main objective, besides providing an economic assessment and forecast to customers, was to maintain a sense of hope and optimism among the businesses and consumers.

“We will persevere,” Mathews said. “We always have.”

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