At a recent investment conference, one of the panelists was an investment officer for the China Investment Corporation (CIC) – the Chinese sovereign wealth fund. She was particularly critical of the performance of their hedge fund managers. The CIC and others have been exiting their hedge fund investments. A common theme of late.
“The secret to my success is I buy when everyone else is selling and I sell when everyone else is buying,” said the great Sir John Templeton to me in 1985. He added, “If you can do that, you’ll be amongst the best in the business.” The contrarian in me just couldn’t help but to think back to that sage advice. It seems to me like we may be arriving at one of those points in time, Sir John. Just saying.
“Sell stocks and buy gold,” former hedge fund great Stan Druckenmiller says. We’ll likely look back and say that was a great call. But such concentration into one asset class is speculation, not investing, and besides who has got the guts and conviction to do that. Stan sure does. Though I do advise to own up to a 10% portfolio weighting to gold.
Stocks are richly priced and have been for several years. I suspect that negative interest rates in Europe and Japan will drive capital from there to here and further boost U.S. stocks and bonds. Who in their right mind could have imagined nearly $12 trillion in negative sovereign bond debt in much of the developed world? The unimaginable has happened. So we watch for global capital flows to flee Europe and come here.
There is no way a pension fund or insurance company can meet its 7.5% return mandate by buying negative yielding German bonds. They will shift out of sovereign debt and seek opportunity. Where are they going to go? They need yield.
U.S. bond and dividend yields are higher than they are in Europe and Japan. The capital market’s infrastructure is the best in the world. The U.S. economy is in OK shape. A sovereign debt crisis in Europe will cause money to seek a safer haven. So watch capital flows for clues. Watch the dollar for clues. And know that what is inflated in price could grow to be more inflated. But keep Sir John in the front of your mind.
This week let’s take a look at two research letters. One is from GMO’s Ben Inker. He talks about how returns have been pushed forward due to the unprecedented drop in interest rates. All assets with long durations (stocks, bonds, private equity, real estate, etc.) have benefited by the drop in interest rates to near zero. He used the following example to explain it:
By Steve Blumenthal | For charts, analysis, and commentary see the rest of the story in On My Radar: Bubble Trouble
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