A New Credit Based Asset Allocation Model
Can you imagine successfully navigating the next decade ahead with a great system. We have arrived at a juncture that will require major efforts on the part of investors to reshape their investments. You see, we believe that major forces at work will be to the benefit of credits. We propose a structure that removes any debt based investments.
I am confronted daily by portfolio managers who ask me the same question. Where am I going to invest to create returns? They realize that an income stream is required. The client's goal might not be best answered with more debts. We think that a growing investment gap will slowly force rates higher. We believe that this predicament will last for more than a decade. See my interview with Jeff Macke!
We do not see the majority reaping the benefits of higher assets while in bonds. Stocks see regular massive outflows. You will see the same with bonds. In the future, a trickle will quickly become a tsunami of withdrawals. We observe that most have not captured the recent stock bounce. We do not believe that investors will return to equities en masse. The great rotation out of bonds will be mostly a professional affair.
Retail investors understood the workings of equities or so it seemed. They have given hope after a few trials. They appear, however, to be the new specialists of interest rates.
It is this new found reality that one must confront and engage. Many advisers might find the task at hand to be insurmountable. We don't. Who else do you know that uses behavioral economics tied with macro analysis successfully?
We thought hard about offering a solution. We often think in terms of liability-driven investing. The size of the bond market makes it a hard task.
We propose to use cash and foreign currencies to do the diversification on the bond side. We have come to believe that this time it is different.
The bond side will be a drag on your future returns. It will also, in our opinion, not be a proper diversification tool.
The stage is now set. Portfolio managers are listening and are responsive to our commodity story.
We have been quite happy to see observers call for the end of the gold and commodity bull market. It reflects on a lack of understanding of the size of this cycle.
More money will flow to tangibles. It is one area where there is little reluctance to participate. Advisers will show the way. They are now more inclined to do so.
Gold and other commodities will be part of our solution along with stocks. Historical evidence would suggest to view stocks as tangibles. As most of you realize, it is also a matter of size and practicality.
Lets test drive our sleek model shall we?
We suggested being bullish on the euro on the 10th of December in our newsletter. We use four ETF's to make comparisons. FXE +4.58% cash replacing debt TLT-6.12% HYG -0.02% LQD-2.27%.
We suggested being bullish on the growth side on the 20th December with two indices being CAF +19.10% and EWG +2.06%.
Our work aims to reflect the aphorism attributed to Einstein.” Everything should be made as simple as possible, but not simpler.”
P.S. We are waiting for the right signal to buy gold. For more read “Finally Why Gold Will Be Rigged Higher”