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.
Since the 1980s, OECD government bonds have tended to be negatively correlated with equities, but during the pandemic that relationship seems to have broken down. Given that the Federal Reserve is embracing a new policy framework aimed at juicing up inflation, there are plenty of reasons to think that bonds cannot continue to play an “anti-fragile” role in portfolios. In this first installment of a two-part series looking at what…
Unconventional monetary policy has led to the largest bond bubble in history; some 15 trillion dollars’ worth of debt globally, now providing negative yields. Bond holders from developed economies may have reason to worry about the future of their savings. History tells us, however, that perhaps they should simply put their feet up, and take a look at less crowded bond markets for inspiration.
As the year draws to a close, we have taken time to reflect on our Theory of Financial Fragility. As its track record develops day by day, it has highlighted certain lessons. In the new year, we recommend paying close attention to the two best-remunerating currencies of the past twenty years; Gold, and the Chinese Yuan. Their leadership will soon become particularly symbiotic.
The three trillion-dollar hedge fund industry has spent the past decade traversing a barren desert, experiencing disappointing performance and dried up returns. An oasis, however, may be in view!