The second-largest US public pension plan earned a respectable 9% return in the fiscal year ending June 30, but Chris Ailman, the chief investment officer of the California State Teachers’ Retirement Plan (CalSTRS), is warning that the Trump administration’s volatile relations with China could cause market disruptions impacting future returns.

Ailman, speaking at the $224 billion pension system’s investment committee meeting on July 20, said the concern is that if China starts to view President Trump’s tweets and policies not as a “trade battle” but a “trade war.”

“China could “start retaliating even more…this could disrupt any positive news in the market,” he said.

“The markets are having a positive bias still because of the tax cuts and corporate earnings, but that all can get wiped out,” he went on.

Ailman said he and CalSTRS Investment Committee Chairman Harry Keiley, a Santa Monica high school history teacher, were at a recent financial conference overseas and heard some poignant thoughts from an individual.

“And they emphasized that the one thing that the USA is exporting right now is that uncertainty around the world,” he went on. Ailman did not name the individual.

Ailman said the United States used to be “the big stable giant in the room. Now we’re acting kind of, I’ll say, crazy.”                 

Ailman said he has talked to a few CIOs from major corporations discussing “surprisingly,” the fact that there has not been a consumer backlash overseas against made-in-America products because of US trade policies.

“You haven’t seen people in China smashing their iPhones or their Ford cars, but there is a growing sentiment around the world to shift away from the USA [products] and shift to China or to their home county,” Ailman said.

Ailman said, “this may be a continuing growing sentiment and not disappear.”

He acknowledged that the US economy seems to be continuing to show “a slow, steady, growth,” but cautioned it may not last. He said while the Fed says the country is at full employment and wages are rising, “I just see such a growing discontent.”

Ailman said everyone he has talked to feels the US is not at full employment and is concerned that wage growth is “spotty.”

He said he read an article on July 20 that unemployment is nonexistent for trained people in Texas and it is advertising $100,000 jobs for those skilled employees.

“I have to think there’s a lot of unemployed in Texas,” he said. “They’re not just those ‘trained people.’”

Ailman said this current period to him, “literally feels like the 1960s.”

“I know we don’t have the Vietnam War, I know we don’t have a college riots, but boy, the discontent in this country is palatable and I don’t know how that ends, but it’s usually not positive and the stock market does feel a little bit like the [1960s],” he stated. “The go-go 60s were a good time, but that set us into the 1970s with stagflation and a lot of problems.”

Ailman said CalSTRS pays a lot of attention to its asset allocation, “but from a risk perspective, we are still about 75% exposed to what are called GDP risks, global, domestic, or gross domestic product risk.” The pension plan has approximately 56% of its assets in global equities, but Ailman has explained in the past that equity risk also comes from part of the system’s private equity and fixed-income portfolio.

The CIO has put increased emphasis over the last year in building a $20 billion risk mitigation strategy to offset an equity market decline. Ailman told the investment committee that even with the increased diversification, “we need the economy to keep hanging in there.”

Tags: CalSTRS, China, Chris Ailman, Donald Trump