The Inherent Contradictions of My Portfolio (or Who’s The Greater Fool..?) (Part II)

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blue chips, bubbles, bullish, China, don't fight the Fed, Europe, floating world, Greece, Japan, Nifty Fifty, quantitative easing, US

OK, I posted Part I a month ago (and here’s its prequel, Welcome to the Floating World…), so you may want to skim those posts again. [Especially as the world’s changed so much since then…what with the bond markets going crazy, Greece staying crazy, etc. 😉 ] To briefly summarise:

The central banks ‘control the price of money, and everything else is a function of the price of money‘, and post-crisis they embarked upon the greatest price-fixing experiment ever – an echo/amplification of the entire era leading up to the late ’60s/early ’70s. Consequently, sustained near-zero rates has meant there’s a wall of money that’s slowly but surely being forced into the equity market. And just like the early ’70s, investors have & will continue to exhibit a distinct preference for Nifty Fifty stocks, i.e. large cap/blue chip companies which guarantee (or at least offer the illusion of) predictable quality & growth in an uncertain economic & fiscal environment. Small & mid cap stocks may be neglected accordingly, but will probably end up getting dragged higher regardless.

As for liquidity, central banks will basically find it impossible to reverse the explosion in their respective balance sheets…Pandora’s Box is now open. And GDP growth may prove irrelevant – since positive/accelerating growth is likely to underpin/encourage market sentiment & valuations, whereas weak/negative growth will simply elicit fresh expectations of central bank stimulus. Most of all, regardless of potential rate increases (or bond market volatility), the absolute level of yields means stocks will arguably remain cheap at any price…

But I really don’t have to make the argument: If/when this bull market keeps marching higher, I have no doubt we’ll be spoon-fed all the erudite & compelling arguments we need to justify it, ’til investors can no longer help themselves & inevitably turn the market into a self-reinforcing bubble. I’m not saying this is necessarily a logical process (what bubble is?!) – but I am saying it could easily happen, plus I’m also saying it could well turn out to be unprecedented…

 [Again, it’s worth remembering two recent & very relevant quotes:

Buffett – ‘Everything is a function of interest rates. Interest rates are like gravity.’

Tepper – ‘Don’t fight four Feds!’]

So, what are the implications for my portfolio?

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Baby Boomers…Yes, It’s All About Them!

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alternative assets, American Dream, austerity, baby boomers, consumerism, emerging markets, entitlement spending, fall of communism, frontier markets, globalisation, Japan, Me Generation, Millennials, USA

In my last post, I acknowledged logic tends to fly out the window in a market correction, and fear & greed take over the driving. My advice was to take a deep breath, just accept the fact we don’t always know what’s coming next, and to positively transform the compulsion to do something anything to relieve your market-induced stress. Because a correction’s a wonderful upgrade opportunity, a chance to (re)deploy your weaker portfolio holdings & cash into higher quality growth companies – those compounders you hardly ever get to buy. Happily, things look a little rosier now (a special thanks, Japan!), and hopefully we’re now heading into a traditional year-end rally…

Of course, long-term performance is the best reminder to always remain invested in the market. Unfortunately, fear & greed can quickly undermine such compelling logic. Companies face a similar issue – it takes a great leader to keep a company set on its long-term growth trajectory, despite all the setbacks it will obviously encounter. The idea great leaders are great storytellers is interesting in this context – it suggests numbers & analysis aren’t enough, people often require a compelling narrative to motivate & help them stay the course. In terms of the markets, the more you can interpret & understand the narrative of the past, the better equipped you will be to see the long-term narrative arc & how it might continue playing out in the future.

So, let me share some of my market narrative. Remember, it’s a story – it doesn’t require proof, and it won’t necessarily remain set in stone. [Accordingly: I’m sure I’ll include plenty of links, but I’ll try resist the temptation to jam this post full of graphs & figures]. You may nod your head, agree, and ponder the implications for your own portfolio – or you’ll replace it with your own narrative…and that’s good too. I’m going to focus on the US here: i) because it’s the growth-engine of the world, and ii) where the US goes, much of the world tends to follow. I’ll also focus on the Baby Boomers – because they bloody deserve the blame…for just about everything! [I promise you’ll hear this more & more in the years to come]:

The Boomers grew up to a constant refrain: A never-ending list of the immense sacrifices and hardships their parents & grandparents endured during World War II & the Great Depression before it. Quite a dose of survivor guilt to be saddled with… Except when they started to come of age in the ’60s, they looked ’round and saw they were actually living in the richest & most powerful country on earth. Hardship and sacrifice seemed like rather quaint & irrelevant concepts, while sexual & political liberation beckoned as a far more enjoyable way to embrace young adulthood. Unfortunately, just when getting a job, getting married, and having kids began to enter the equation, everything turned to shit…

Portfolio Allocation (XIV – Emerging & Frontier Markets)

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agri-business, correlation, corruption, developed markets, Donegal Creameries, emerging markets, Europe, financial crisis, frontier markets, German property, Japan, portfolio allocation, portfolio performance, QE, US, volatility

Continued from here. Wow, it’s been a leisurely journey – spanning a full year – is this really my last post of the series?! Hmmm, we’ll see… Here’s my portfolio allocation pie chart one more time:

[NB: This is from Jun-2012, but since then the only major changes (funded mostly from my Hedge Fund allocation) are: a) an increase in Property from 10% to 13%, as I continue to scale up my German property exposure (see Parts I to V – also here), and b) a large jump in Agri from 5% to 11%, due to my purchase of Donegal Creameries (DCP:ID) & its subsequent hefty appreciation. Note I don’t classify DCP as an Irish stock – after all, the company feeds people (potatoes, mushrooms & yogurt) and animals, what could offer a more ideal uncorrelated exposure?!]

So, Where’s The Bloody Inflation..?!

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baby boomers, banks, Bernanke, budget deficit, capital ratios, de-leveraging, debt monetization, Debt/GDP Ratio, ECB, Europe, European sovereign debt crisis, Fed, financial crisis, fiscal deficits, Flub-Med, GDP growth, Hunt brothers, income/dividend bubble, inflation, Japan, multiplier effect, Occupy Wall Street, politicians, quantitative easing, real assets, risk aversion, savings rate, stagflation, US, Volcker

I was beginning a new post in my recent Hitting the Century series (and here), and realized my next 3 investment allocations were to real assets – Natural Resources, Agri & Property. This v quickly got me thinking about inflation, enough to devote myself to this post instead:

Along the way, dear reader, you may have noticed my pronounced distaste for fiscal & monetary policy in the developed world. Particularly in the US... That’s not intended to be a US slap-down…and certainly not praise for Europe either! It’s simply a pretty inescapable conclusion if you compare the US & (the hard-core of) Europe over the past 4 decades. Jesus, I struggle to think of somebody with any real power in the US who truly gives a flying f**k about their accelerating debt burden, debt monetization, or the long-term external value of the dollar. In contrast, the ECB & certain Eurozone countries still actually exhibit a painful reluctance to take that road to monetary & fiscal oblivion – even in the face of a European sovereign debt crisis!

Whither the US, Europe & the EUR/USD..?

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activist investors, austerity, Bundesbank, catalyst, CNBC, distressed assets, Edward Gibbon, emerging markets, EUR/USD, Europe, Event Driven, Fed, frontier markets, idiots, Japan, Japanese debt crisis, NAV discount, private equity funds, Red Bull, student debt, US

OK, I confess, this isn’t really about the EUR/USD FX rate. I was beginning another article, and my despair over the developed markets & their prospects just kept interfering..! But let’s try keep this somewhat brief – maybe I’ll return again after reading my Gibbon – and hopefully it will prove a good lead-in for my other article.

Despite the dismal performance in the US & Europe (why even talk about Japan..?) over the past decade, I just can’t get too hopeful from here. I sighed, and resolved again to just ignore the news, when I heard the growing swell of anti-austerity political dissent in Europe (and even fresh mutterings about EUR exit, and devaluation).

When Irish Eyes Were Not Smiling

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bank debt, Debt/GDP Ratio, default, fiscal deficits, Ireland, Japan

I’ve avoided talking about Ireland’s debt situation ‘til now – it makes my blood boil to think about it! It’s v difficult to comment or analyze when you’re starting from a point that should never have been reached…

Where to begin..? Well, nearly every day I get a nagging feeling, try to ignore it and finally (with a start) wonder if I was off sick the day the Irish government explained EXACTLY why they took on tens of billions of bank debts/losses?! And I never got the note either! Plenty of friends, relatives and colleagues ask me to explain this mystery, and to my embarrassment I just can’t! Now I just tell them what I think they want to hear…

Please help me. Why?!?