What is happening on the battlefield in Ukraine left aside a second war (not military this time) in the monetary sphere. Roles are reversed. The Western world pushes hard to collapse the ruble, and thus destroy the Russian economy, and so, Russia retaliates. In both wars, resistance seems to be much stronger than expected. In three weeks’ time, we’ll see if Europe yields to President Putin’s requirement to pay Russian gas in rubles, or not.
The outcome could be a monetary game-changer.
US CPI at 7.5% YoY and 5% in Europe, oil at more than $100 a barrel, Ukrainian refugees by the millions, wheat prices up 30% this year revealing possible food shortages to come in the Maghreb, European governments over-indebted by the management of the Covid crisis which, therefore, can only mean minimalist support measures in the face of the energy shock – a shock that will lead to stagnation in the next six months (likely recession), and FED raising rates by 0.25% this month – the first in an expected series of ten successive hikes – which cannot contain inflation as real interest rates will remain deeply negative… Despite the warlike rhetoric of Mr. Powell, central banks have lost the upper hand.
We are back to the real world.
The Rentier is busy doing many things but portfolio management. As presented in previous publications, they can allocate once and for all 25% of their savings in four repulsive asset classes: equities, long-term government bonds, gold, and cash. The outcome is a four-body stable system with remarkable statistical properties, successfully riding inflation, disinflation, booms, and busts for 70 years.
The Rentier’s portfolio passed its live stress test last week. However, today, the Rentier still does not sleep well at night given what he sees on TV.
They are searching for a cunning plan.
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.
A few months ago, with a mischievous look in his eyes, Charles Gave noticed the S&P 500 was paying one gram of gold per annum in dividends!
What kind of hidden information lies behind this coincidence? Scarcity, efficiency, and the competition between them in asset markets.
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?!
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.
« All the things I could do, if I had a little money » chantait ABBA en 1976.
Aujourd’hui, ce n’est plus l’argent qui manque. Les grandes banques centrales des EtatsUnis, de l’Europe et du Japon, en ont imprimé entre 6 et 7 billions de dollar américains depuis le début de l’année 2020. Comment comprendre cette monnaie ? Est-elle surévaluée, sous-évaluée ?
« All the things I could do, if I had a little money » ABBA sang in 1976.
Today, there’s no shortage of money. Since the beginning of 2020, the major central banks of the United States, Europe and Japan have printed between six and seven trillion US dollars combined. How can we approach this currency? Is it overvalued or undervalued?
In recent weeks, attention has focused on the surge, and subsequent correction, in US technology stocks. Yet an asset class that has greatly outperformed the Nasdaq 100 this year is gold-mining equities. In this piece, Charles seeks to develop firmer investment rules for managing gold and gold-mining stocks within a portfolio.