Putnam: 2020 is another country

8/3/2019 Putnam: 2020 is another country

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2020 is another country

Robert L. Reynolds

President and

Chie Executive Ofcer

Putnam Investments

Edited rom a speech given

at MutualFundWires

Thought Leadership Series

Inuencers Summit 2011Boston, Massachusetts

October 5, 2011

My thanks to Sean Hanna or that very generous introduction and also to

MutualFundWire or asking me to join you this morning and try to look out a decade

or so. The truth is, Sean, that compared with the big stories o 2011 like Greek deault,

the debt ceiling, S&P downgrades, high unemployment, low housing prices, wild

volatility Id rather talk about 2020 any day!

Still, I have to say that I totally agree with something that Yogi Berra once said:

Prediction is very hard especially about the uture . But this much I am reasonably

sure o: When the year 2020 rolls around, we will not still be obsessed with Greek debt,

eurozone banks, or U.S. housing prices. These issues, which are so painully compelling

today, will be resolved or better or worse.

Come New Years Day 2020, well be acing new challenges, but also new opportuni-

ties many o which we cant even imagine. Thats why this talk is called 2020 is

another country. And yet despite the many, many unknowns and surprises that lie

ahead o us, I do want to suggest to you that there is a lot about the world o 2020 that

we really can oresee at least in broad outline.

In the interests o time, I am going to just skim the headlines on our key drivers that are

already shaping 2020:

Globalized securities markets

Demographics

Emerging investor needs and fnancial innovations designed to meet them

The coming race to solvency, which is the next phase in the sovereign debt mess were all

tangled up in right now

A globally wired world

Lets start with some thoughts on global markets. Here, the rst, most powerul lesson

rom the crash o 20082009 is that the worlds capital markets are now thoroughlywired; their ates are linked. Riots in Athens, tsunamis in Japan, debt downgrades all

o these ricocheted around global markets at near light speed.

Diversication still has signicant value to be sure. But correlations across oceans and

time zones are growing stronger. These linkages across stock, bond, and derivative

markets are what acilitated the global electronic bank run o 2008 and elevated the

U.S. Federal Reserve Board to a new role as the worlds balance sheet o last resort.
http://www.putnam.com/


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But despite the shocks inicted by the crash and thanks, in part, to massive govern-

ment bailouts and easy money policies global equity markets have largely

rebounded, rising more than $22 trillion rom their low in 2008 to over $54 trillion by

2010, according to the World Federation o Exchanges.

I dont know i were up a trillion or down a trillion today, but however unnerving this

most recent wave o volatility has been, it is unlikely to derail the huge increase in the

number, depth, and trading volume o global stock and bond markets that weve been

seeing since the 1980s.

To the contrary, governments everywhere are competing to oster robust capital

markets, even while they work to develop new and stricter oversight and regulation. No

serious policymakers now avor a return to isolated national capital markets. And given

what were seeing in Europe, it doesnt seem that bank-based nancial systems like

those on the continent are any more secure than nancial systems that rely mainly on

capital markets as in the Anglo-American model.

Just to cite one example close to home here: It strikes me that money market mutual

unds in the United States have a much better record o avoiding losses to taxpayers

than our banking system has. So capital markets are here to stay as a core element in

our nancial systems alongside traditional banking.

The utility o capital markets or reaching social goals like retirement security or

nancing education or medical care tells me that their role will continue to grow through

2020 and beyond. And that suggests several key implications.

First, as investors, we all need to shit to a ully global mindset in our personal and insti-

tutional investment strategies. We need to assess individual securities in the context o

the global markets and the industrial sectors they compete in. We need to build truly

global portolios, with no home-country biases. This trend has been under way or years

now, but I believe it still has a long, long way to go.

Second, as citizens o the global marketplace and thought leaders, we should support

strong, air, and transparent regulation to restore public condence in securities markets.

Good rules make good markets. And we also need regulators who will step up, as many

ailed to do, regrettably, in the run-up to the 2008 crash. Personally, I would like to see all

nancial services and markets held to the kind o high standards that have made the 40

Act and the mutual und industry great American success stories o the past century.

Naturally, we all want to maximize reedom and creativity in our capital markets, but we

should also recognize that not every market practice or nancial innovation necessarily

adds value or enhances public condence. When in doubt, as with high requency

trading or synthetic ETFs today, regulators should take a deep dive and careully deter-

mine whether these practices really do add value and liquidity.

A third implication o the continued rise o capital market nance is that these markets

will exert powerul pressure on governments and political leaders to adopt sound and

sustainable scal and regulatory policies. Some o you may recall the wish expressed by

ormer President Clintons advisor, James Carville, who wanted to be reincarnated as

However unnerving this

most recent wave o

volatility has been, it is

unlikely to derail the huge

increase in the number,

depth, and trading volume

o global stock and bond

markets that weve been

seeing since the 1980s.


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the bond market because o the huge power that would give him to shape national

policy. We can see that almost daily now as markets press European governments to

cut national decits and resolve doubts about the stability o their banking systems.

Capital markets inuence is likely to grow over the decade to 2020 and push govern-

ments everywhere in the direction o scal restraint and accountability.

Let me turn now to another orce shaping 2020 that may be even more powerul than

capital ows. It moves very slowly, but with the orce o a glacier. I am speaking, o

course, about demographics.

The demographics o global aging

Here are two numbers that express the most positive untold story o our lietimes: 48

and 72. What are they? They are, respectively, the average lie expectancy o the entire

human race; 48 years in 1950, 72 years in 2025. This really is amazing. In the course o a

typical baby boomers lie, human lie expectancy on earth will rise by 50%. This is an

absolute net gain despite multiple wars and a steady diet o mayhem, which the media

reports on every day. No similar advance in human well-being has ever happened in so

short a time in all o recorded history.

But rising longevity is having some quite stressul eects. It is, or example, straining

public and private pension plans across the whole developed world, with the greatest

pressures, or now, being elt in Europe. In the United States, the number o citizens over

age 65 will rise rom just over 40 million today to nearly 55 million by 2020 as the huge

baby boom generation edges into retirement.

The overwhelming majority o these people will be drawing on Americas programs that

support seniors Social Security and Medicare. Congress cant vote down this huge rise

in demand or support; the president cant veto it. So we are going to have to make some

real, painul changes in national policy, picking a solution set out o three ugly options:

Either we raise the share o revenues going to the ederal government well above the

average o 18% seen since World War II, or

We cut back, deeply, Social Security and Medicare, or

We slash every other type o ederal spending rom the Marine Corps to NPR

Thats an unappetizing menu, I know. But its the truth. And it makes me very glad that

Im not running or public oce.

Here is the good news, though: When it comes to demographics, the United States is in

much better shape than most o our major trading partners. We have higher birth ratesthan Europe, Japan, Russia, and China, and we allow more legal immigration than the

rest o the developed world combined. So our population will be growing all through the

21st century, and so will our active workorce, by about 5% over the next 20 years, while

the number o working-age Europeans alls 11% and Japans working population

plunges by 17%.1

1 United Nations, Populations Division, 2011.

Capital markets inuence

is likely to grow over the

decade to 2020 and push

governments everywhere

in the direction o scal

restraint and accountability.

By 2050, demographers tell

us that roughly one in our

citizens o developed nationswill be over age 65, but only

one in ve Americans will be.


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By 2050, demographers tell us that roughly one in our citizens o developed nations

will be over age 65, but only one in ve Americans will be.2 So yes, America is aging. We

are going to have to make some serious reorms to our entitlement programs. But we

should be able to adjust more easily than our riends across the waters. For one thing,

well have a lot more kids paying FICA taxes!

Emerging investor needs: low-volatility andlietime income solutions

Lets turn now to some emerging investor needs and product innovations that were

going to see in the investment world by 2020. You dont need a crystal ball to anticipate

rising demand or low-volatility investment products or continued growth in demand or

asset-allocation-based solutions beyond unds that are bound to specic style boxes.

I am convinced that we will also see a huge appetite or total-return or absolute-

return strategies that oer at least the possibility o delivering economically

meaningul, positive returns whatever markets do. The prime drivers o demand or

these types o products will be investors close to or already in retirement. These inves-

tors have been badly shaken by two black swan events in less than a decade, and they

are getting seasick rom recent volatility.

Some have suggested that this kind o higher volatility is just part o the so-called New

Normal. But I dont believe that investors especially older, more afuent investors

will ever get used to these kinds o market swings. Thats why I expect to see steady,

rising demand right through this decade or products and strategies that oer at least

the hope o less rocky, more predictable returns. We could see just as dramatic a rise in

demand or low-vol and absolute return type unds as we saw over the past decade

or target-date liecycle strategies.

Something else well see or sure will be an explosion o oerings in the lietime income

arena. Its simple, really. Baby boomers are the rst mass generation o sel-directed

retirement investors ever, and they are turning 65 at the rate o roughly 7,000 a day.

What they are discovering and millions more will discover each year is that turning

a lies savings into a reliable source o lietime income is actually tougher than accumu-

lating that nest egg to begin with. We are going to see a ourishing o lietime income

oerings: annuities, partial annuities, non-annuity drawdown plans, and many, many

other income innovations.

I want to close now by touching on a ourth trend that will shape the next decade: It is

what I call the Race to Solvency, a competition that every serious nation on earth isgoing to have to join.


We will also see a huge

appetite or total-return

or absolute-return

strategies that ofer at least

the possibility o delivering

economically meaningul,

positive returns whatever

markets do.


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The race to solvency

As I see it, we are now in the midst o what you might call The First-World Debt Crisis.

The prime issues driving the news and the markets tend to be questions about sover-

eign credit risks o deault driven more by ears o political paralysis than by absolute

lack o resources. Just this moment, there is a wave o worry that suggests that many

investors ear these public debt crises will prove impossible to solve.

But what I want to suggest to you is that we will nd ways to resolve these challenges

using many o the same techniques used to deal with the Third World debt crisis: capital

haircuts, loan-restructuring, and renancings. I am not saying it will be easy. But I am

saying that debt crises do get resolved, always. This one will too.

For much o the rest o this decade, I expect the major nations o the world will be

orced, like it or not, to engage in a race to solvency, curbing decits, restoring scal and

trade balances, and nding ways to reboot their economic growth. Globalized capital

markets will demand that nations compete on these terms, and they will.

The prize or the winners will be continued access to aordable credit and global

investment ows. And among the major competitors, the United States is quite well

positioned to win. Here are just a ew reasons why:

We have a much stronger tradition o limited government and ar more reliance on

individual and amily responsibility than on the welare state.

It should be ar easier politically or the United States to get back on a path o sustainability

than or our riends in Europe or even Japan.

Unlike Europe, we not only have a common currency, but a common government and

central bank.

Whats more, Americans can already see rom the Europeans current struggles the

consequences o simply allowing defcits and debt to pile up to a tipping point and then

having to slash government benefts under market-driven crisis conditions.

Even those Americans most committed to sustaining social welare programs and a

true saety net are beginning to recognize that our entitlement programs require major

change, either by us or by some very ruthless market orces.

The good news is that we are already moving to address our long-term decit prob-

lems. Americas political discourse has changed undamentally. Following President

Obamas health-care bill, or example, policy debate on health care is now ocused

mainly on curbing cost increases, and it will be or years to come.

Ater the very disappointing results in terms o jobs rom the massive surge in govern-

ment spending in 2009 and 2010, any appetite or more tactical stimulus spending is

gone. In its place, we are seeing a demand or more strategic, pro-growth reorm o our

tax code. As we speak, a bipartisan select committee o Congress is struggling to nd,

by this Thanksgiving, an additional trillion-plus dollars in cuts to uture decits. Even i

Congress ails and it may there will still be major, automatic cuts in deense and

other discretionary spending painul ones.

For much o the rest o thisdecade, I expect the major

nations o the world to be

orced, like it or not, to

engage in a race to solvency,

curbing decits, restoring

scal and trade balances, and

nding ways to reboot their

economic growth.


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The issue o national solvency will not go away. Americas next presidential election

and the politics o the rest o this decade are going to center on ways to reboot

economic growth and job creation, cut spending, and get our debt under control.

I believe well do that.

In act, I expect that come 2020 we will look back on 2011 with the same sense o relie

that we now look back on the stagation, gas lines, and national malaise o the mid

1970s. Whats more, by 2020 the next phase o Americas uture will begin to positively

inuence our expectations.

Seen rom the perspective o 2020, Americas demographic and economic advantages

over global competitors will be much more visible than they are today. America in 2020

will not only have a still-growing population, but will be heading toward well over 400

million people by mid century. By contrast, the populations o Japan, Russia, most o

Europe, and even China will be in decline by 2020, with some o them on track to a

population implosion by centurys end.3

America will be relatively younger than our major global rivals, less burdened by

welare-state expenses, and ar less dependent on imported sources o energy. Our per

capita GDP will still be the highest in the world more than our times higher than

Chinas, according to the World Bank. And Americas culture o innovation, our open-

ness to continuous change, will still be carrying us orward.

One last point: Americas leading corporations are in great shape nancially at the

beginning o this decade. They have been earning record prots; they now hold over $2

trillion in cash on their books.4 They have truly global ootprints, drawing 40% plus o

their revenues oshore.5 There is actually a case to be made that core U.S. equities

could have major upside by 2020.

Obviously, none o us know how markets will perorm rom here to 2020. And we know

that weve just lived through a lost decade with negative returns to the S&P since the

year 2000. But unless you believe our economy is in or such sustained hard times that

equity markets will do worse rom 2000 to 2020 than in any previous 20-year time

rame, then the opportunity risk o missing gains over the next decade may be very

much higher than the downside.


4 Federal Reserve, 2011.

5 U.S. News & World Report, 2011.

America will be relatively

younger than our major

global rivals, less burdened

by welare-state expenses,

and ar less dependent on

imported sources o energy.


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Conclusion

I know that optimistic vision or Americas uture may seem to some people here like

wishul thinking, especially given the rocky markets and depressed national mood we

see today. We all know the vast majority o Americans now ear that the country is on

the wrong track. In September, Gallup reported that only 19% o Americans are content

with the way we are being governed. Thats an all-time low.

So let me say very straightorwardly: American success is not inevitable. Rebooting our

economy and our spirit is something that Americans are going to have to argue about,

ght or, and believe in. And yes, its possible that we wont agree. Maybe our political

system will reeze up. Maybe well nd no will to compromise. And i that happens, we

will decline.

But somehow I dont think so. In act, I dont think anyone, ever, has won by betting

against America. And the reason I am condent is precisely because were all so

worried. One o the healthiest o all American traditions is our constant tendency to

doubt ourselves and worry about our uture. We have had these waves o anxiety every

couple o decades or so since about 1776!

But what history tells is that Americans dont just get worried when our country goes

o track. We x things. Winston Churchill had it just right when he said: You can always

count on America to do the right thing, ater trying everything else. I have to believe

that America is too strong, too resilient, and too optimistic a culture to accept the near

stagnation and joblessness that some call The New Normal.

Now, I know that others are not advocating the New Normal; theyre just predicting it.

So let me make a prediction o my own: Americans are going to demand something

better than that rom our political leaders. We are going to get our country on a path

back to national solvency, and we will be outgrowing our debts well beore we pop thechampagne corks on New Years Day 2020.

What history tells is that

Americans dont just get

worried when our country goes

of track. We x things.


8/8

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The views and opinions expressed are those o Robert L. Reynolds, President and CEO o Putnam Investments,

are subject to change with market conditions, and are not meant as investment advice. Mr. Reynolds is afliatedwith Putnam Retail Management.
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Putnam: 2020 is another country