2014
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jennypenny
- Posts: 6862
- Joined: Sun Jul 03, 2011 2:20 pm
Re: 2014
More prognosticating (for GMO fans) ... http://www.fuw.ch/article/equity-market ... vervalued/
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jennypenny
- Posts: 6862
- Joined: Sun Jul 03, 2011 2:20 pm
Re: 2014
I got the impression that he thought there was an equal chance that the 'run' might last a long time or might crash and burn, and it was hard to plan for both possibilities.
From the interview...
What if there won’t be any exit?
That’s a possibility. The Fed might decide that growth is still too weak and that inflation is not an issue. Then they could keep their policy in place for longer. The history of financial repression shows that it lasts a very long time. The average length of periods of financial repression in history is 22 years. We’ve only had five years so far. That creates a huge dilemma for asset allocators today: How do you build a portfolio with such a binary situation? Either they exit QE, or they don’t. And the assets you want to own in these two scenarios are pretty much inverse. So you either bet on either one of these scenarios, with is kind of uncomfortable for a value-based investor, or you say because we don’t know, the best we can do is build a robust portfolio. A portfolio that is able to survive in all kinds of scenarios.
And what does such a portfolio look like?
If you have continued financial repression, you want a much higher share of equities, because they are the highest performing asset, compared to bonds and cash. If you think financial repression will go on for another 20 years, you need to have equities. For the scenario that the central banks will exit their policies, you will want to own cash, because that’s the only asset that does not get impaired when interest rates rise. So you have two extreme portfolios: One almost fully in equities, the other almost fully in cash. So that’s what we do: We have about 50% in equities, and 50% in dry powder-like assets. That means some cash, some TIPS, and some long/short equity spread trades. But as said, we are reducing the equity part over the course of the year, to build up dry powder.
From the interview...
What if there won’t be any exit?
That’s a possibility. The Fed might decide that growth is still too weak and that inflation is not an issue. Then they could keep their policy in place for longer. The history of financial repression shows that it lasts a very long time. The average length of periods of financial repression in history is 22 years. We’ve only had five years so far. That creates a huge dilemma for asset allocators today: How do you build a portfolio with such a binary situation? Either they exit QE, or they don’t. And the assets you want to own in these two scenarios are pretty much inverse. So you either bet on either one of these scenarios, with is kind of uncomfortable for a value-based investor, or you say because we don’t know, the best we can do is build a robust portfolio. A portfolio that is able to survive in all kinds of scenarios.
And what does such a portfolio look like?
If you have continued financial repression, you want a much higher share of equities, because they are the highest performing asset, compared to bonds and cash. If you think financial repression will go on for another 20 years, you need to have equities. For the scenario that the central banks will exit their policies, you will want to own cash, because that’s the only asset that does not get impaired when interest rates rise. So you have two extreme portfolios: One almost fully in equities, the other almost fully in cash. So that’s what we do: We have about 50% in equities, and 50% in dry powder-like assets. That means some cash, some TIPS, and some long/short equity spread trades. But as said, we are reducing the equity part over the course of the year, to build up dry powder.
Re: 2014
"Unfortunately I sense the bears are not yet done mauling investors. So expect to see a touch more pain and a violent move lower before a capitulation is found along with a healthy rebound in stocks."
That's what Zacks says. What do you guys think? Chad?
That's what Zacks says. What do you guys think? Chad?
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IlliniDave
- Posts: 3909
- Joined: Wed Apr 02, 2014 7:46 pm
Re: 2014
I like Jack Bogle's quote, which I'll paraphrase since I don't remember it exactly:
"The stock market is a giant distraction to the business of investing."
In the long haul stock returns are driven by dividend payments and earnings growth. In the short run, 5 years or less, all kinds of things can push stock prices up and down. Ultimately though, dividend yield and earnings growth will prevail. I think looking 10-20 years down the road, stock returns will be a percent or two lower than they have been historically, but still worth holding for the long haul.
For 2014 my pure guess is that we'll see positive broad market returns but not nearly as high as 2013. Political and central bank uncertainly will be counteracted by a gradually strengthening economy, and corporations are generating profits which ultimately drives things. Of course, you can trade that prediction and four quarters for a $1-bill at almost any bank.
"The stock market is a giant distraction to the business of investing."
In the long haul stock returns are driven by dividend payments and earnings growth. In the short run, 5 years or less, all kinds of things can push stock prices up and down. Ultimately though, dividend yield and earnings growth will prevail. I think looking 10-20 years down the road, stock returns will be a percent or two lower than they have been historically, but still worth holding for the long haul.
For 2014 my pure guess is that we'll see positive broad market returns but not nearly as high as 2013. Political and central bank uncertainly will be counteracted by a gradually strengthening economy, and corporations are generating profits which ultimately drives things. Of course, you can trade that prediction and four quarters for a $1-bill at almost any bank.