You can only purchase two things in the markets: a contract (for example a 10-year bond), or a title of property (like a share). I draw this observation from our trusted source, Charles Gave.
However, you cannot value both in the same way, simply because the first has a finite duration (here 10 years), and the second is a perpetual.
The consequence is of upmost importance when rates are very low – as is the case today – and when they begin to rise (for example from 1.5% to 2.5%), which could be the case for the United States in 2022.
In this scenario – all other things being equal – the contract loses less than 9%, but the title deed loses 40%.
«Yes, is like credit, no is like cash,» said Cornelius Jacobus Langenhoven a century ago, the writer who composed the South African national anthem.
On one hand, inflation is back this year, globally. That is a fact. Whether it’s temporary or not, no one can say. On the other hand, global liquidity in USD for the first time in eight months is tightening. This is a major macroeconomic event of the month.
A contraction in liquidity in an inflationary context is a harmful configuration for equities, but also for bonds, be they long-term ones with a fixed coupon, or short-term ones with an inflation-indexed coupon.
It is no longer unreasonable to say “no.” And no, is like cash.
Investing in Chinese stocks inexorably provokes a contrasting feeling, a mixture of fascination and anxiety. This is reminiscent of the tempting flowers one wishes to pick at the edge of a cliff, “The Flowers of Evil,” by Charles Baudelaire who revolutionized French poetry at the end of the nineteenth century.
Among the various investment strategies, the one proposed by Gavekal-IS mitigates anxiety. Evergrande does not change the case. The conclusion remains the same on the Shanghai Stock Exchange Composite Index: risk on!
US Investors worried about equity valuations safely reallocating to fixed income. Safely?
With 10Y US government bonds providing negative real rates, losing more than 5% in the last 12 months (same for gold), cash yielding zero, and expensive TIPS reaching a 2 standard deviations’ outperformance vs. fixed-coupon bonds year-on-year, what exactly does safely mean?
Here, we propose a simple rule to dynamically select the best US fixed income asset.
The simplest rule ever.
Our previous publication, “The Four Monetary Quadrants,” revealed how the volume and price of money deeply influences asset allocation. We now shift gears to the transition between one quadrant and another. Specifically, how to collapse model risk, select asset classes, and still sleep well at night.
Start by clearing out the dead wood!
Back in the late 70s, Charles Gave realized asset classes are very sensitive to two major macro variables: growth and inflation. Thus, he suggested a Four Quadrants’ framework for portfolio construction: inflationary boom, inflationary bust, disinflationary boom and disinflationary bust.
Here, we propose to mirror the concept, crossing volume and price, but from the monetary angle: the amount of liquidity vs. the remuneration of such liquidity.
A new “Quadrants’ representation” emerges to drive asset reallocations.
Information technology changed the world from knowledge transmission bottlenecks to instantaneous access and worldwide diffusion of non-events. Does this drastic change help investors decide between buying equities or bonds?
Well, look to our Youngsters!
One year ago, facing the largest bond bubble in history, Gavekal-IS published “Bonds. Which Bonds?” focusing on four investment alternatives to US fixed-rate treasury bonds to protect income portfolios:
The four positions generated more than 20% alpha against US bonds, on average, which now raises the question of a possible over-extension of their outperformance.
Keep? Sell? Who knows?!
Ten years ago, Nobel laureate Daniel Kahneman described two systems the brain uses to form thoughts in his best-selling book, Thinking, Fast and Slow.
System 1: Quick!… Think about a color, and tool… And the winner is: red hammer! Quick!… Think about a safe asset class…. And the loser is: bonds!
System 2: Here, we propose a method to enhance bonds’ expected returns, in any circumstances. Slow, logical, effortful.
This method is embedded into our TrackMacro App. If you have 90 seconds to spare in system 1, first watch the TrackMacro video!
In a series of three publications in February 2021, we explained how accelerating inflation – not simply high inflation – had been awfully bad news for equities for 140 years. Some of our readers argued that rather than inflation, interest rate was the key driver of equity behavior. If central banks continued using their purchasing power to cap government bond rates at low levels, equity markets should be fine.
Here, we refocus our analysis on interest rates, and our conclusion remains the same: last round for equities!
As for any economic indicator, monetary polices can be viewed from two interdependent yet different angles:
A major “price” signal took place two years ago, announcing the debasement of major fiat currencies and the awakening of gold. Since then, gold has spiked 40%. A “volume” signal took place just one week ago, announcing a second wave of world liquidity in USD intimately correlated with the second wave of the COVID pandemic.
The consequences of the “volume” signal on asset allocation (if it lasts) could be as significant as the one on “price” some two years ago.
For the first time since the end of the subprime crisis in 2009, the S&P 500 book stopped growing on December 31st, 2020 over 12 rolling months. The US market momentum is therefore fully supported now by intangible value.