“Keep Extra Dry Powder,” Says Osterweis Capital Management Founder

John Osterweis, founder, chairman and chief investment officer of Osterweis Capital Management advises investors to hold onto more cash than usual due to the recent ambivalence and mood swings in current global markets.  A recent article in Barron’s by Osterweis and Matt Berler, chief executive of Osterweis, explore social trends created by the new economy that might have negative implications for future economic growth.

One clear trend is the widening economic gap between blue-collar and white-collar jobs which has led to fairly substantial income inequality and a deep sense of frustration. “Are we heading toward a negative feedback loop in which those people disadvantaged by technology and globalization gain enough political clout to demand policies that cause an economic slowdown rather than an economic acceleration?” Osterweis and Berler ask. “One needs to watch how events unfold.” Another economic  trend is the accelerated demand for oil in both the U.S. and globally.  The new unconventional shale oil and gas deposits have been reflected in weak prices in the U.S, and Osterweis and Berler do not predict energy prices to sustainably rebound for another 12 months. “The longer prices stay below the $50-$60 range, the longer the industry will likely underspend. This could lead to a supply crisis developing sometime in the 2017-2020 time period.” There is good news for global oil consumers, though. Improvements in efficiencies mean that U.S. shale producers won’t need prices to return back to the $80-$100 range in order to be profitable.

The trend of monetary authorities attempting to stimulate growth and inflation is largely due to low growth and low inflation around the world. Currently, there are concerns that low inflation will become actual deflation, leading people to spend less and save more. “In a deflationary environment, more companies cannot earn enough to repay debt, bankruptcies increase, banks suffer, credit contracts and the economy gets trapped in a deflationary spiral.” Osterweis and Berler also point to the trend of favoring newer technology companies to define and dominate emerging industries such as web-search, e-commerce, or social media.  “Technology and globalization together have enabled better managed, aggressive companies to drive down costs and thereby create a sustainable advantage versus their competition” Osterweis and Berler explain. Because of this, Osterweis Capital Management has refocused their attention onto more market-leading companies. They are also focusing on companies that can continue to grow despite the current market, “particularly those that dominate some niche, industry, or sector.”

Nonetheless Osterwies Capital Management believes under the current circumstances, it’s best to maintain a larger cash position than normal. As Osterwies and Berler caution: “there are clear earnings headwinds in certain sectors, so keeping some extra dry powder seems sensible.”