By Kirk Spano
I have been talking about slow global economic growth since I've been writing for MarketWatch — nearly five years now. In May 2015, when I expanded my thoughts a bit and wrote "Global Growth Will Never Be the Same,” there was a lack of belief in what I was saying. Earlier this year when I dubbed the structural situation as "slow growth forever,” I was outright mocked. Over the past few weeks, several members of the Fed have agreed with me about the deeper nature of slow growth. I'm not sure if that's good or bad.
Slow economic growth is structural
Among the first people to see the structural slow growth situation was Larry Summers — the man who would have been Fed chief. Back in 2013, Summers noted that : " In the past decade, before the crisis, bubbles and loose credit were only sufficient to drive moderate growth." He went on to expand on his ideas that slow economic growth was a long-term trend with a column titled: “ The Age of Secular Stagnation .”
Charles Evans, the Chicago Federal Reserve Bank President, recently gave a speech in China that largely agreed with Summers. In that speech , Evans stated that: " Today, the world economy is still in a low-growth, low-market-interest-rate regime. And more and more economists see the essential characteristics of this state as likely persisting for some time to come, as shown in their analytical perspectives and baseline forecasts ."
In August, St. Louis Fed President James Bullard gave a presentation titled: Normalization: A New Approach . In that paper, he outlined the different policy regimes that we might be faced with. In his presentation, Bullard covered the many ways that economic growth has slowed and is being held back. He concluded that, " The current regime appears to be characterized by slow growth and low real rates of return on safe assets ."
Eric Rosengren, President of the Boston Fed, recently co-wrote a paper about a potential " third mandate " for the Fed that addressed financial stability. While Rosengren now supports an interest-rate hike in the name of financial stability, he acknowledges the long-term challenges to economic growth. Coincidentally, I coverd similar topics in a recent blog post titled " The Fed's Final Fantasy. "
2017 Fed voting member, Minneapolis Federal Reserve President Neel Kashkari, pointed out in a China speech something that I have been discussing for years: " Demographics is not a monetary policy problem. We are not going to solve demographic problems with low interest rates ..." In an essay titled " Nonmonetary Problems: Diagnosing and Treating the Slow Recovery ," Kashkari summarized the problems of slow growth forever aptly: " If the U.S. economy fails to return to pre-crisis growth rates, improvements in standards of living for families will come very slowly, and entitlement programs such as Social Security and Medicare will be much harder to pay for. " He went on to discuss how "secular stagnation" effects growth and might be remedied. I strongly suggest you read Kashkari's essay, it's among the best summaries I've seen about the slow growth economy.
Janet Yellen, of course, carries the most important Fed opinion. She has repeatedly refused to raise interest rates for fear of stalling the growth we do have. If she does raise interest rates, it could be due to Rosengren's arguments as MarketWatch columnist Greg Robb recently noted.
Investing in remedies to slow economic growth
With the Fed largely accepting "slow growth forever," it is vitally important to your portfolio that you do, too. My basic approach to finding investments has two steps: First, find industries and regions with good top-down characteristics. Second, within those spaces, find opportunities to buy value or hop on a growth trend. Two industries with both value and growth right now are the smart-grid and alternative-energy spaces.
As Kashkari noted, and was agreed to by both presidential candidates, though not necessarily Congress, infrastructure spending is one form of tonic for slow growth. Not only does it improve the ability of business to produce, it provides long-term middle-class jobs on its own. The types of infrastructure spending we see might not be what you think, though.
While Donald Trump compares our airports to third-world nations, that is certainly not true. Within an hour or two of anywhere in America you can find an international airport with flights or connections to darn near anywhere in the world. And while our roads get a bit bumpy, I'm here in Wisconsin where hard winter weather is noticeable in the pot holes, there is an abundance of good roads once you get past bottle-necked cities.
The type of infrastructure spending I believe is coming will mainly be in the smart-grid and alternative-energy spaces. We already know that the grid is at risk for "cyber" attacks. A safer and more efficient grid will cost hundreds of billions, however, will provide long-term jobs in both construction and maintenance. There is an energy and smart-grid bill pending in Congress with bipartisan support that I believe will get passed in the lame-duck session. Once that bill is passed, it will amount to a stimulus package for smart-grid and alternative-energy development.
The First Trust Smart Grid ETF /zigman2/quotes/201178568/composite GRID +0.31% is not a fund I recommend due to illiquidity and high expenses, however, you can find some solid companies among its holdings to add to your own personalized portfolio. One such small company is Silver Spring Networks which provides solutions that help utilities deploy a smart grid. The company is profitable and debt free. I also believe it is a likely takeover candidate at some point.
There are several other companies worth analyzing in the First Trust fund. If they ever lower the fees by about half and gain more assets, it would be worth looking at. Until then, cherry pick its holdings.
In the alternative-energy space, the Guggenheim Solar ETF /zigman2/quotes/210041821/composite TAN -1.91% is once again a buy on its recent pullback. You will get exposure to a global basket of solar-related companies and collect a dividend over 2%. I believe the pullback in solar is largely due to the smoothing effect of extending energy tax credits to 2020. While that is hurting growth in the short-term, it is positive for the intermediate term.
With TAN, you get exposure to a global basket of solar stocks, including Chinese companies. If you prefer not to have that exposure, or to dilute it, I recommend buying a couple of solar leaders with excellent financial strength among TAN's holdings.
I currently rank First Solar /zigman2/quotes/209356097/composite FSLR -0.07% as a buy. It is trading below book value and is net debt free with a solid growth rate. First Solar is the leader in the utility-scale solar space. It is near its lows for the year, but has seen significant accumulation in the past week. I also rate SunPower /zigman2/quotes/200243424/composite SPWR -1.18% as a buy. It is also trading near it's 52-week low and offers strong growth across multiple solar platforms. SunPower is 70% owned by Total , so despite more substantial debt, I am comfortable with the financial support its oil major quasi-parent can offer.
Subscribers to Kirk's investment letter
have been recommended to have a starter positions in the Guggenheim Solar ETF, Silver Spring Networks, First Solar and SunPower for appropriate accounts. <EMPHASIS>Kirk Spano and certain clients of Bluemound Asset Management own the Guggenheim Solar ETF, Silver Spring Networks, First Solar and SunPower.</EMPHASIS> Neither Spano nor Bluemound clients plan any transactions in the next three trading days. Opinions subject to change at any time without notice.