Take Five: Jack Ablin, chief investment officer, BMO Harris Bank
As chief investment officer at BMO Harris Bank, Jack Ablin is a highly respected figure in the investment world. He is a frequent contributor to CNBC, Bloomberg, The Wall Street Journal, and Barron’s and was named one of the top 100 wealth advisors in North America by Citywealth magazine in 2006, 2010, and 2011. He is the author of the Wall Street Journal bestseller Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace.
On April 10, Ablin will speak to clients of M&I Wealth Management on “Economic Outlook at Market Update 2012” at the Madison Museum of Contemporary Art on State Street in Madison. It will be his first speaking engagement in Wisconsin since M&I Wealth Management became part of BMO Harris.
We caught up with Ablin to get his take on the investment landscape and some of his prescriptions for a more favorable investment climate.
IB: You’re going to be speaking on the outlook for financial markets. What is your overall take? Do you think the recent upswing in the stock market, for example, is sustainable?
I think that we’re enjoying a cyclical bull market within a secular sideways market. So certainly, there’s no doubt we want to bask in the sunshine, but unfortunately, I think that at the same time, in this environment, we have to continually look over our shoulder for potential pitfalls.
IB: So it’s not necessarily going to be a boom cycle?
No, unfortunately, we’re not at a point where we can go back to the buy-and-hold strategy. We still have to kind of play offense and defense.
IB: You’ve said that even if Greece defaults on its debt, it will be unlikely to create much of a ripple in the Eurozone. Do you think there’s been too much anxiety in general about the Greek situation?
I do. I think that there’s no question about the level of anxiety related to Greece, but it’s really emblematic of a broader problem. There’s no question that governments worldwide, including the U.S., have too much debt on their balance sheets, but at the same time I view Greece as an isolated and extreme example.
IB: You propose going all the way in eliminating tax loopholes, and you also say we should get rid of corporate taxes entirely. Why?
One reason is, despite the fact that we have the second-highest corporate tax rate in the world, we’re not collecting corporate taxes for the most part. Only about 1% of GDP is collected in corporate taxes. Considering that we’re collecting about 15.5% of GDP in taxes altogether, I think it’s something like 92% of all taxes collected come from individuals anyway. It’s expensive, it’s complicated, and we’re not collecting the money anyway. I would rather make the corporate tax rate zero and then just tax benefits anytime they move from the corporate entity to either employees or owners. That’s where you tax it. So you eliminate this whole notion of double taxation of dividends. … If you want to make them 39.5% for dividend payments, that’s fine now because it is ordinary income and it wouldn’t be doubly taxed.
So it’s really just separating it, and I think it undercuts a couple of arguments. For example, one that the Republicans have that says by taxing wealthy individuals you’re actually taxing companies, subchapter S companies that create jobs. Well, if we were to make the corporate tax rate zero, I can assure you there would no longer be subchapter S corporations; every company would be a corporation.
If you go back over the last 100 years and look at the biggest influences on whether or not the stock market goes up or sideways, like is happening right now, regulation is almost as important as war in terms of diluting our country’s return on capital. And so if you consider, say, the early ’80s, in 1982, the beginning of the last secular bull market, there actually was a period of peace and deregulation, and of course an easing of energy prices and an easing of interest rates, that I think helped usher in nearly an 18-year bull market where we were up over 2,000%. I just think as long as we continue to wage this war on terror and we continue to have high levels of regulation, we’re going to be mired in this secular sideways pattern.
IB: What would you say to the counter-argument that these laws are a response to having too loose of a regulatory environment?
Yeah, I think relaxing the Glass-Steagall laws that allowed essentially bank deposits and insured institutions to gamble with a government backstop was probably the beginning of what caused the financial crisis. Maybe instituting the Volcker Rule would be one thing, but Sarbanes-Oxley and Dodd-Frank are pushing it too far in the other direction.
IB: You say that the momentum for small cap stocks is beginning to fade, and that large caps will soon come to dominate. Why is that? Is it just a cyclical thing?
Yeah, it’s cyclical. Small caps have outperformed large for nearly 10 years, and as a result have gotten relatively too expensive, and while small caps are up so far this year, they’re not up to the same degree that you’d expect for the amount of risk that they have, so they’re actually underperforming large caps on a risk-adjusted basis. So, for example, the beta of small caps is 1.3, which would suggest that if the S&P is up 10% then small caps should be up 13% … and yet they’re not, they’re about the same. They’re just starting to fade relative to the risk level.
IB: Anything else you’d like to mention that you might be covering in your presentation?
I think we’re going to talk about how we solve this persistently high unemployment rate. We’re going to use, obviously, education in the long term, but perhaps there are some other measures in the short term. I don’t know if I’m going to touch it or not, but I might examine right-to-work versus union, and how the right-to-work states are performing relative to the union states. Generally, I find it’s the right-to-work states that don’t really have a strong educational background to lean on, whereas I would say Wisconsin does. In fact, Wisconsin is probably one of the most highly educated states in the country, and so in my view they don’t necessarily need right-to-work to be able to compete, whereas, say, a state like South Carolina does.
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