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International Paper Co
How do you see the global economy today?
I’ve been obsessing about the shift in resource prices that started 10 years ago, which is reducing the growth rate of everybody. We calculated the percentage of global GDP that was going to resources, and it declined beautifully, forever, until 2002, when it hit some very low number like 9 percent. The price of pretty well everything has doubled and tripled since then. This has taken a bite of three points out of global GDP.
And the world is underestimating the bite of a declining population. They think that growth is going to bounce back after this mess. And it just ain’t so. The growth rate in the global population—let’s say the peak was 1971, 2.1 percent global growth—is now 1.2. In 30 years it’s going to be zero.
Yeah, the global population is generally reckoned to peak in about 2040, 2050, maybe 2060. In addition, people are working fewer hours. And the aging of our population is severe, starting about now. So per capita, you simply have fewer people in the 20-to-65 age group, population slowing, working less hours—it’s becoming a pretty decent-size drag on the economy.
What about gains in productivity?
Productivity has been eroding, not that fast but pretty steadily. And part of it is just the maturing of society. There’s no way we’re going to recapture that robustness that you get from a huge surge in manufacturing. It’s quite different for the developing markets. They probably have 20 years before they cool down. But it’s a big factor for the U.S. Every five years, you’ve dropped another point in manufacturing and replaced it with people cutting each others’ hair.
How about the fiscal cliff and Europe’s debt crisis?
I don’t want to disappoint you, but I think that the debt situation is exaggerated. The things we should focus on are the level of education, the amount of capital spending, the quality of innovation, technology.
As an investor, what do you do?
I’ve hero-worshipped the presidential cycle. Going back to 1932, if you take the first and second year together, they’ve had no real return in the market. All of the return has been compressed into a gigantic Year Three and a respectable Year Four. For us, the cycle years start on October 1st. So now we’re in the dreaded first year. And we have Republicans threatening to add fiscal constraints into a very fragile economy. We have the European situation. We have China stumbling in an incredible slow-motion style. I think it’s a really good year to keep your head down.
So Mitt Romney would reduce corporate profits?
Profit margins are abnormal. Anyone can see that, given the weak economy. Paying down the debt will allow them to become more normal. In the old days, the International Papers (IP) of the world would break our hearts because just as they were getting decent margins, they’d build another plant. We’d say, “Why the hell are you doing that?” And they’d say, “Oh, it’s market share. We’re going to crush everybody.” It wasn’t great for profits, but it was magnificent for employment and the economy. Now they say, “Oh, I’m not going to build a new plant. We’re going to build up a war chest, buy our stock back because that’s highly correlated with my personal rewards: push up the shares, and hit my bonus.” The bonus culture has changed the flavor of how we do business.
What if Obama is elected?
History speaks pretty clearly that the markets do better with Democrats. Republicans’ ideas of what constitutes fiscal responsibility simply are not good for the stock market. Democrats have many tendencies, but one of them is to look after the workers, and actually that tends to be good for demand and good for markets. These capitalists who are desperate to elect Republicans should study their history books.
So what will you do next year with all that money you manage?
I am going to be careful, particularly for the first half of next year. Great brands of blue chips are not so bad in the U.S. Emerging countries are about fair price. Beaten-down European stocks, particularly the so-called value stocks, are probably a little cheap, although risky. And resource stocks, once they reflect the weak economy—and we’ll get another whack-down—will be a wonderful long-term purchase. Farmland and forests, which should be the backbone of any long-term, serious portfolio. … It will also be a good time to buy in.
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