Earlier this summer, Neeti Bhalla Johnson, the new President of Liberty Mutual’s Global Risk Solutions division (who at the time was Liberty Mutual’s Chief Investment Officer), shared her thoughts on the trends facing the U.S. economy. Here is a summary of what she had to say.
“Is inflation coming? Inflation is already here.
The question really is, is it transitory or has something structurally shifted in the nature of the U.S. economy and workers’ expectations that could cause inflation to be stickier than it was in the past? There’s a big divergence of views and absolute confidence on each side. This is a truly unprecedented time and a certain level of humility is critical in how we think about this.
We’re viewing it as transitory, however, humility means you watch the key indicators – and wages are a key indicator to watch. The way to watch wages is going to be through the labor force participation side of things.”
“I think everybody would agree there is a need and an opportunity to repair or replace our infrastructure and to invest where we think the risks come from potential climate change.
The estimated costs are high and we have to get started. Whether you believe in the severity of climate change or not, I think everybody agrees we need to repair, replace, and stabilize things like our grid.
Depending on what gets passed – and here’s where the details matter – there is a potential to actually raise the growth rate of the U.S. economy.
The U.S. hasn’t been able to grow sustainably over the last 15 to 20 years. We just haven’t. We have had ups and downs, but we’ve averaged somewhere in that 1.7-ish number. Infrastructure investment can raise the productive capacity of the U.S. economy and help set a path to growing sustainably to over 2 percent again. I would make that bet all day.”
“I fundamentally believe that the line between public and private assets is blurring. That matters from the vantage point of how you think about investing because the markets are more fluid.
That also matters from the perspective of how we think about insurance and our insurance products, because a private company today may be public tomorrow, and how do you work through the life cycle? And by the way, public companies go back to becoming private. The needs are different, and you need to be prepared for both.
To give you a sense of how quickly the private capital raised is growing – the annual aggregate private capital raised over the last several decades has been growing steadily at about 14 percent CAGR for the last decade, and the trend is just continuing.
If you look at how allocations are shifting, what you’re starting to see is people saying private credit is a real thing, it’s an asset class, and so this allocation is there. There is an emerging opportunity set across equity, credit, and digital assets, both from an investing perspective and an insurance perspective.
I’d say this is a growing opportunity set. It isn’t going anywhere. You’ll read a lot about SPACs in the news, and how they are on the down versus the up. The question you have to ask yourself is – because it matters for D&O insurance, for example – are SPACs as an alternative to IPO, is it a real structure that will survive? The answer is yes. Will it be modified? Are there going to be great SPACs and really awful SPACs? Absolutely. Nature of the beast.
But if you believe that some of these innovations that effectively either liquify certain venture portfolios or create an opportunity to go from private to public are persistent, then you have to get smart about how you cater to that audience.”
Supply chain delays
“Supply chain issues are already dragging on growth. It’s already affecting economic growth today and, in the next 12 to 18 months, if we don’t start to see de-bottlenecking from a supply chain perspective, then we have a problem.”
“I think it’s hard to have a clear investment strategy around Bitcoin or Ethereum. But the theme of decentralized finance is here to stay. It has the potential to change the nature of our financial system and insurance as part of the financial system.
Central banks around the world are waking up and realizing that, thus far, these digital assets thrive on being outside of the system. The question is, what’s the regulation on this? How do you bring them into the system, and, if you do bring them into the system, will people who are using them still want to use them? How does that change over time?”
“As someone who was born in India and grew up in Kenya, I would say the U.S. has an exorbitant privilege in the fact that we issue debt in our own currency. People want to hold our debt in our currency. The dollar is mostly, predominantly, the currency in which global transactions get settled.
Most things come back to, do people still want to own our debt, and at what level? Our interest rate coverage ratio is very low, and that’s partly because interest rates are low, which then brings you to the question, will rates go up? Will people demand higher rates to hold U.S. debt? Maybe. History doesn’t prove that out.”
“I would say we’ve probably seen the largest increases in house prices as a result of COVID already, so from this point on the second derivative, rate-on-rate, is going to be lower. It will slow down, but I think it’s fair to say that residential and housing will continue to see gains.
The interesting question is going to be what happens to office space, and how does that play out? I’ll tell you, from a portfolio perspective, we are positioned through COVID but also now, we think residential investment – particularly single-family and multi-families – are particularly attractive places to be, and precisely because I do believe that the second derivative of that growth is slower. But you definitely will see an inflection point here.”