He suggested that the nation could be headed for “a more disappointing rate of growth.” He also warned that passive investors could be vulnerable if the stock market turned down. Owning a stock market that is going through a protracted decline could be very painful, he said.
Yet, as the stock market is marking new highs, it is easy to miss the dangers, he argued, because things have improved so much.
Warning signs of the possible end of the cycle, McLennan said, include record government and corporate debt levels along with continuing geopolitical problems, which have been masked by the last 10 years.
A decade ago, unemployment was over 10 percent and now it is 3.9 percent, the lowest jobless number since 2007 and “pretty consistent with what they were in the 1990s,” he said.
Another danger, McLennan said, is that debt levels usually go down when unemployment declines at the end of the cycle. But that hasn’t been the case this time, he said.
“This [deficit] is very large. And he noted the last time unemployment numbers were so low, the nation had a budget surplus. Still, McLennan said his firm will make no prediction that the economy’s and stock market’s vigorous growth will end. He will only say he sees many signs of overvaluation.
What is an investor to do?
Be careful. That is the way McLennan is running his money.
The First Eagle Investment Management funds, which he said are having problems finding good buys, seem geared for hard times—or at least a slowdown in the booming market. In his Global Fund, for example, McLennan recently had close to 30 percent in cash and gold.
Gold is among his favorites; there is a considerable gold stake in almost all his funds. “The price of gold relative to the S&P 500 is at a very low level.” He says it is at a similarly depressed level to where it was in 2007. What this indicates, he concluded, is that the price of defensive assets is cheap.