Keep QE going and go active, adviser says

Five questions for Heritage Capital's Paul Schatz

Nov 19, 2013 @ 12:01 am

By Jeff Benjamin

Paul Schatz, president of Heritage Capital, typically lets it all hang out when expressing his views on markets, economics and sometimes even politics.

An active asset allocator and adviser with 25 years' experience, Mr. Schatz is on board with the Federal Reserve's quantitative-easing policy and would even like to see it extended beyond early next year, when the Fed is expected to start tapering its $85 billion in monthly bond purchases.

InvestmentNews: Do you think it's time for the Fed to start reducing the five-year QE program?

Mr. Schatz: From my perspective, the answer is no. If you believed in quantitative easing to begin with, you can't stop now. The results of stopping now will be disastrous. The big problem is QE was created because rates were already at zero, so it is effectively a way to get negative rates. I don't believe the economy can stand on its own right now without quantitative easing.

InvestmentNews: What do you want to see before you'll support tapering of the QE program?

Mr. Schatz: Ever since 2008, my thought has been that this is a typical post-crisis recovery. You don't cut back on QE until we get through the next recession. There's always another recession coming, that's the business cycle. If we had quit QE after the first round, we probably would have had another recession and then we probably would have been done with it, but it would have been painful.

InvestmentNews: What is the biggest challenge facing the U.S. economy?

Mr. Schatz: I don't think there's a single biggest challenge. We're living through this typical post-recession recovery. Companies are beating on [the] bottom line, but not on [the] top line. But probably the biggest challenge is the employment markets, but they are functioning exactly as they should in a post-recession recovery. We are going according to the script, but people don't have the patience to live through it.

InvestmentNews: Where do you see the greatest areas of opportunity?

Mr. Schatz: That's the toughest part. You have a triple-digit gain in this bull market, but the bull market is old. I think we're approaching crucial point toward either a melt-up followed by a correction of 50%, or we peak during the first quarter of next year and have a garden-variety pullback of 20% or 30%.

The opportunity is to be really, really mindful of the portfolio. Presumably, most people have made a lot of money in last five years. People are feeling really good and they're into passive strategies. I think this is the most opportune time to employ active strategies in a portfolio. Right now, we're in the danger zone where risk is increasing every day, and you need to lay some protection on the portfolio.

InvestmentNews: Do you think the botched Obamacare rollout will have any impact on the markets?

Mr. Schatz: I think it has zero impact. Except for making incredible media fodder, I don't think the rollout or fixes is having any impact on markets right now. I do think it will have a permanent and detrimental impact on the economy longer-term.

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