While the majority of investors maybe fretting about another lurch down in global growth, Paulsen believes the greater risk is that global growth exceeds expectations.
Markets are unprepared, he says, with certain sectors vulnerable if the US Federal Reserve needs to increase the pace of interest rate rises.
Part of the reason for Paulsen’s optimism is that for the first time, he says, there has been a synchronised global economic stimulus.
“We gave the entire globe huge fiscal and monetary stimulus over the past 12 months,” he says. “Those outside the US also got a currency stimulus. This is going to work.”
In addition, the oil price has plummeted and there has been a tremendous decline in the long-term cost of capital. “That packs a powerful punch. There is a pretty good likelihood that is going to create growth.”
What crisis?
Equally, Paulsen says, the situation in China has been misinterpreted. “There is a view that China has been trying to revive its growth rate for years, but actually what we have seen for the past three or four years is China trying to slow itself down.
“It is only since the end of (2014) that China has been trying to pull itself back up. After all, Chinese policymakers did not fully drop the lending rate until the end of last year. It was only at that point they finally got the money supply down. They finally depreciated the currency and got the stock market going. I don’t think they were trying and failing. They just hadn’t tried.”
He also says there are signs the eurozone is doing better. He believes the region is like the US but two years behind. Any recovery in the eurozone would also support global growth, he says. With this in mind, and the US in good shape, the Fed might be forced to raise rates faster than the market expects.
Central to Paulsen’s view is his belief that the problems in the US economy and elsewhere are down to supply issues, not demand. These issues have not been treated, which is why US economic growth looks similar to that prior to quantitative easing.
Paulsen says: “Despite unprecedented policy stimulus, we have grown a little more than 2%. The difference between supply and demand-side growth has resulted in unemployment falling from around 10% to 5%.
“People thought it would not be possible to get the employment rate up without growth at around 3-4%. It turns out that we did not really need any growth at all. All we have done so far in this recovery is soak up unemployed resources.
“This has created no negative fall-out for financial markets. There are no wage and price pressures, there is no margin pressure. You don’t challenge profit margins or the valuation level of stocks. You can grow without negative consequences.
“That is about to change because the US is sitting at full employment.”
