- A scenario of falling Chinese property prices, perhaps combined with a government clampdown on alternative sources of funding, would therefore be a devastating outcome for the copper market, simultaneously robbing the metal of an end-user and leading to a mini credit crunch. The obvious home for the bonded material would then be the LME warehouses in the Asian region, with very negative implications for sentiment towards copper prices.
- In relation to food / energy prices - More likely, we see stagnant job growth as producers protect margins and relatively stagnant consumer spending. For now, the sizable budget deficit is helping to bolster the economy.
- First of all, companies DO NOT equal economies. We invest in companies, not economies. US large cap companies are outperforming the US economy (see outperforming chart on next page), with impressive revenue growth since 4Q09 relative to real GDP growth.
- Also, we find that many companies within the large cap universe are super-efficient and highly productive at generating earnings and cash flow growth through market share gain and new product introduction
- But with the University of Michigan consumer sentiment index faltering so badly, especially the key ‘expectations’ component, then it does appear that there will be no spending spring this spring.
- There are up to four million homes in foreclosure or in the pipeline so to be talking about any housing recovery at this juncture is premature, to say the least.
- Portfolio managers as a group are running their funds overweight equities by an average of 67% relative to their typical benchmarks. And polls show that onethird of them believe QE3 is coming this summer. We already know that this Bernanke-led Fed is willing to be extremely aggressive, but as we saw in 2010, the hurdle is high for quantitative easing. We need (i) signs of a double-dip, (ii) a stock market correction of at least 15%, and (iii) deflation, not inflation.
Browne laid out a very simple asset allocation model in his 1998 book, Fail-Safe Investing. The concept starts with the premise that there are four extremes in the economy and that a good portfolio will have components that will outperform in each one:
- Inflation: Gold and precious metals outperform
- Deflation: Bonds outperform
- Prosperity: Stocks outperform
- Recession: Cash outperforms
The PP invests 25% in each of these asset classes, a strategy easily accomplished using three ETFs and a money market fund:
| Asset Class | Fund or Stock Ticker |
| Total Stock Market Index | VTI |
| Gold | GLD |
| Long Government Bonds | TLT |
| Cash | - |
- rebalanced annually, would have returned 8.5% per year, with annualized volatility of 7.7%
- There are, however, some potential problems with the PP. First, we have just seen a period when both long-term bonds and gold have substantially outperformed. Browne envisioned a world in which long-term bonds outperform in a deflationary period and gold outperforms in an inflationary period. What are we to make of the fact that gold has substantially outperformed in recent years in a deflationary environment? The trailing five-year annualized return of GLD is almost 20% per year. The long rallies in both government bonds and gold are a reflection of investors’ fear of equity risk. We should not expect gold and bonds to move counter to one another in coming years. In other words, the PP has enjoyed an extended period that has been perfectly aligned for its outperformance, but that there is no reason to believe that we should expect this performance to continue.
- Emerging world scientific rise: Traditional leaders (North America, Europe, Japan). Popular (China, India, Brazil). Iran (fastest growing country 736 papers in 96, to 13238 in 2008). Turkey (improved scientific performance at a rate similar to china). Tunisia (R&D spending rose from 0.03% to 1.25% of GDP between 96 and 09)
- End of QE2 - Fed announcements for ending QE lead to rising bond prices and falling yields ( opposite of what you would expect). The logic is that less Fed liquidity leads investors to pull back from riskier assets and switch to safer T-bonds. This fits the pattern of US equities, which have closely tracked the size of the Fed's balance sheet since late 2008, support the widespread belief that the Fed's unorthodox monetary policy has helped shares prices. If the Fed stops EQ2 early, history suggest equities and bond yields may fall, rather than rise.
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