When Loomis Sayles vice chairman Dan Fuss started managing money for Yale's endowment in 1971, he found himself reporting to the one director of the Yale Corporation all others revered, William McChesney Martin, who had chaired the U.S. Federal Reserve Board from 1951 to 1970. Fuss's first move was to shift the endowment to 90% equities, of which 10% was allocated to Japan, as he told attendees at IMCA's annual conference in New York today.
Investing in Japan in the 1970s was a no-brainer—in retrospect. The tiny community of global investors, which included the legendary John Templeton, in that decade often earned 40% or more in any given year in the Japanese stock market, thanks to the surging yen and booming Japanese economy. But Fuss's decision went over like a lead balloon with some in the Yale community.
Memories were long or short, as Fuss put it diplomatically. What he didn't say but implied was that more than a few directors of Yale's board were furious about investing the endowment in that nation when memories of Pearl Harbor still lingered. By the time mainstream investors came around to the concept of global investing in the late 1970s the easy money had been earned.
In some ways, the times were a distant mirror of today's economic world. Ever since the mid-1960s, interest rates had been moving upwards as the nation embarked on several expensive adventures, including the escalation of the Vietnam war, the Great Society and the War on Poverty. There was one place for bonds to go––and that was down.
When discussing portfolio decisions with the revered Martin, Fuss, who was still in his thirties, had the audacity to tell the wise man what he thought the Fed would do to exit the U.S. economy's predicament. Martin listened politely and told Fuss that his analysis was an eminently sound, sensible prescription. Then he told Fuss why he was completely wrong.
Martin told Fuss "the Fed was completely a creature of Congress." The following year, President Nixon would be up for re-election, as would 435 members of the House of Representatives and one-third of the U.S. Senate. As Fuss learned from Martin, the latter's successor, Arthur Burns, would flood the bond markets with money to ensure a booming economy in 1972. Then came the hangover and a decade of stagflation that followed until another Fed chairman, Paul Volcker, broke the back of inflation.
Even though the U.S. federal deficit is shrinking today, Fuss told IMCA attendees that "we are sort of in a box, barring a lot more people entering the work force." That seems unlikely given our current demographics. Even if some new really big thing comes along and creates millions of new jobs, it will eventually be offset by retiring baby boomers.
The booms in energy and technology don't seem to be creating the number of jobs needed to produce a federal budget surplus that the U.S. briefly enjoyed in the late 1990s, when Fuss recalled being invited with 11 others to lunch with a Treasury Undersecretary who was wringing his hands about a world of no Treasury bonds thanks to budget surpluses from then until eternity. The undersecretary's nightmare was an illusion, as the entitlement time bomb takes that scenario off the table.
Fuss said that the nation isn't going to cut entitlements for the current generation of retirees and near-retirees. They paid in all their lives and they vote. And they do more than just vote. "Look at who counts the ballots," Fuss quipped.
It's a bigger problem in Europe, China and particularly Japan than it is in the U.S. How are they dealing with it? Fuss says that in Japan lots of senior executives receive retirement parties on Friday and show up to work on Monday with their salaries reduced by the amounts of their pensions. Seniors in Japan are working in nursing homes caring for other seniors.