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CFO Survey: A Time of Extraordinary Risk

Posted by Larry Doyle on February 22, 2013 6:53 AM |

Who might that be flashing the warning signals about our markets and our economy?

I am always predisposed to look for risk on the horizon so that we can all navigate accordingly, but the quote referenced in the title of this commentary comes not from me but from professors at Duke University’s Fuqua School of Business.

What prompts them to make such a statement? Only a survey of over a thousand global CFOs that projects economic activity a quarter ahead of most other surveys. Now that is the type of material we like as opposed to the “look in the rear view mirror” provided by many outlets.

Let’s navigate . . .

Chief Financial Officers See More Downside Risk in the Stock Market than Upside

Analysis of Duke survey data shows CFOs aren’t feeling good about stock market returns

Everybody is looking for a crystal ball into the economy. Duke University may not have exactly that, but the quarterly Duke/CFO Magazine Global Business Outlook Survey anticipates economic activity a quarter sooner than other surveys. Now, an analysis by Professors John Graham and Campbell Harvey of the results collected over the years shows Chief Financial Officers aren’t feeling good about stock market returns.

CFO forecasted long term (10 year) returns of the Standard and Poor’s 500 were the lowest in December 2012 since Duke began asking the question of CFOs in June 2000. The analysis also shows CFOs are more uncertain about the economy than in most other quarters. CFOs are also anticipating a decrease in the risk premium (expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond return.) Read the full paper.

This analysis has implications from retirement to fears of the stock market “overheating.” Professor Campbell Harvey breaks down the findings in a Fuqua Q and A.

1. Do you consider these findings a reflection of the “new normal” in the market? Should we be resigned to low returns and low growth?

“Prospective returns are very modest. First, consider the bond market. A long-term bond yields approximately two percent, which is the rate of inflation. Hence, there is no “real” return. Turning to the equity market, many would consider the market “fully valued.” Hence, prospective returns are also modest. This is confirmed by the CFO forecasts. One consequence of low returns in the bond and stock markets is that investors are chasing riskier investments, such as investments in emerging markets or small risky investments in the U.S.”

2. What do you think these findings say about retirement plans?

“For most plans, it is hard to justify any exposure to long-term bonds given that you are locking no real return. While equity returns are lower than usual, they are still higher than prospective bond returns. Hence, you are seeing increased interest in equity allocation (but with very modest expectations.)”

3. A top Federal Reserve official made references earlier this month to possible “overheating” of some parts of the credit market. What do you think this analysis of CFO opinions says about the possibility of “overheating?”

“The overheating of the credit market is a direct result of the Fed’s low interest rate policy. Why buy a Treasury bond with a zero percent real return? People are looking to other types of fixed income investment (such as corporate bonds.) These investments offer higher expected returns because they are riskier. Also, as more and more people buy these corporate bonds the prices go up and the credit spreads get very tight (the so-called overheating.) The Fed’s policy has had arguably an unintended consequence of making investors’ portfolios riskier.”

4. Looking at this analysis, what kind of insights can you gain from CFOs about the types of investments people should be considering moving forward?

“This is a time of extraordinary risk that is mainly induced by policy makers. There are two main sources. First, there is the risk that the government cannot agree to fix the unsustainable course it is on with four consecutive trillion dollar fiscal deficits. Part of this risk has to do with the potentially debilitating measures (such as tax increases) that would choke the nascent recovery. Second, there is a risk that the Federal Reserve will not be able to reverse the extraordinary monetization it has pursued since the financial crisis. The Fed is essentially bankrolling the Federal government to the tune of $85 billion per month. It will not be easy to take this back. If they fail, inflation will inevitably increase. Inflation will sharply increase the cost of government financing and create a vicious circle where more money is needed to be printed.”

For those interested in the specific responses from US-based CFOs, this survey provides fascinating details. Relative to the prior quarter’s survey, these CFOs — the ultimate insiders — project declines in the following areas: capital spending, technology spending, research and development spending, advertising and marketing spending, full-time, temporary, and outsourced employment. They project inflation to continue to run at approximately 2%. They project declines in overall productivity, but increases in health-care costs with expected decline in the growth of revenues as well.

A wealth of barometers to help us navigate the economic landscape. Thank you to our friends at Fuqua for such great work.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred


    Why are most asset prices excluded from the inflation calculation? I could argue, rather convincingly, that the wealth effect is nothing more than unreported inflation.

    At a minimum, rather than relying on owner’s equvalent rent for the housing component of inflation, wouldn’t it would be more realistic to compute an inflation adjusted debt service component?

    As a nation, we need to realize that the risk in the system is the below market interest rates that allow us to under-report liabilities, over-report asset values and assume too much credit.

    When asset bubbles pop, why is the the public always the one stuck with the bill while creditors walk away with all the gains in the form of bonuses, stock options and dividends?

    Shouldn’t the Fed have more of a responsiblility to protect the public interest?

    • LD


      You are pulling back the veil on the game of charades being played.

      That is not how the charlatans do it although I thank you for informing people of the fact that, “hey wait a second, who is this man behind the curtain?” That is Ben Bernanke devaluing our currency.


      • fred

        “There are no markets anymore, just interventions by central banks and governments. If this is correct, then short and medium term investment strategy is entirely a matter of anticipating the next intervention, and of course the Federal Reserve doesn’t call or e-mail me with any notice–just the heads of the investment houses that act as agents for the US government in the markets. So what is left for ordinary people to invest in if all values are manipulations, illusions, or just political calculations subject to change in an instant? What is there left to invest in if British economist Peter Washburton was right in 2001 when he wrote that the main objective of central bank policy is to deprive the world of any standard of financial measurement?”

        Chris Powell, GATA.

        • Obsvr-1


          since you are not on the insiders list for FED leaks, and as they say the FED will stay irrational longer than you can stay solvent, THEN an approach I use and you may consider is to use the “Watch the Masses and Do the Opposite” .

          The “professionals” only make money on transactions, so they need to pump transactions, e.g. move money around; so when they move the Masses your opportunity as a contrarian opens …

          And as LD always cautions … Navigate Accordingly.

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