Hunt for profits: BlackRock's top strategist

Russ Koesterich, global chief investment strategist at BlackRock Inc., the world's largest money manager with $4.6 trillion in client cash, was in town last week to front the Chamber of Commerce's annual Economic Outlook breakfast and discussions. He sat for a few minutes to tell what he says these days when he's holding big clients' hands.

Will China's slump hurt America?  The big issue with China is less about growth. It's more about what isn't known. How fast is the deceleration? Faster than they are saying. There's a lot of uncertainty about their debt.

Now this is not affecting the U.S. economy very much by itself. The big issue is China, Russia, Brazil, all slowing down. Brazil and Russia are contracting. What does that mean for how fast the glocal economy can grow? In their (recent growth period) they racked up huge debt.

Brazil, Russia, China... how about India, the "fourth BRIC"? India and Mexico, they are the success stories among the emerging markets. In India we've finally begun to see (economic) reform. Even so, in India too the pace has slowed and people are a bit disappointed because they had such high expectations. It will take time to implement reform and it's not happening at the pace a lot of investors want.

So much of what we write about lately is deals pushed by hedge fund investors, like Nelson Peltz at DuPont, Dan Loeb at Dow Chemical, Carl Icahn at AIG and Pep Boys and more. Do they play any positive role in the U.S. economy? Or are they short-term destroying companies? Is there any difference between the social impact of an index fund vs. a hedge fund?   

Different investors have different time horizons. As you get larger, you have a longer horizon. It's more difficult to trade (profitably) on a very-short-term basis.

With that said, there has been an under-investments in American companies. They've been buying back shares (instead of updating operations. Same holds true for government infrastructure: investment has slowed.)

We haven't seen the kind of pickup in capital spending you would have thought, coming out of a recession. The industrial plants are old; the roads are old; the ports are old.

If we haven't invested, where has all the borrowed money gone? It went toward consumptins. Not to productive capital. So we have a problem of low-productivity capital stock. We need to invest more for the long term.

Do government incentives, does the tax code, favor debt, deals and speculatoin over operating capital and labor investment? We have a tax code, on the corporate and individual  level, that favors debt. Mortgages are deductible; dividends aren't. There are proposals to reform the tax system. It's very difficult. We have had divided government for many years.

And the uncertainty -- Financial stability has been a little less of an issue since 2012. Before that we had a lot of temporary provisions in the tax code, and companies were reluctant to make some investments. It's been a bit better in recent years, yes.

Are you worried, with the energy sector, commodities, China and Brazil, all in recession, will that drag down the economy? The domestic economy looks to be in decent shape. Households good shape. Manufacturing has the most struggle (but is a smaller slice of the economy.)

But you know we are already six years into this expansion. It's already been a long one.

The thing that worries investors a great deal: What do you do, the next time you have a recession? Interest rates are already close to zero. And, if we need a stimulus, in an era of divided government there are not very obvious fiscal responses.

If you're a banker, it's much more difficult to make money if the short end (of the yield curve) is anchored close to zero. Cheap money has contributed to the increase in (asset) valuations. With the compression in credit spreads we enjoyed less of a tail wind (boosting profits on) financial assets. When rates go up, (overextended adjustable-rate borrowers) will be desperate.

And savers will benefit -- A lot of older people are wrestling with how to generate retirement income. People have to contend with very long retirements. Where will they get the income? We are in an envonment where the returns you will get from a typical portfolio of stocks and bonds will be lower the next five years than the last five.

So a small rise in bond, bank deposit or loan income won't make up for the weak stock market -- Over the past few years, biotech was on fire, and we were led by the FANGs -- Facebook, Amazon, Netflix, Google. People chased after thoe growth stories. But for a typical business it's now much harder to boost growth than it was 25 years ago.

Haven't smartphones, hand-held computers backed by cloud servers and animated by apps, made us more productive? Productivity official numbers are growing slower than they used to.

Some believe the innovations we have today don't stand up to the measure of years ago, the advances of life that followed electric light, the phone, home appliances. Or that there's a lag between the technology and any real returns we see from its adoption, like there was with computing in the 1960s into the 1980s.

But I think productivity may be better than we realize. How do you measure the productivity in Uber and AirBnB and the user economy?

There will be a long time in which people get better at learning to use these devices.