This blog marks my first foray into writing since last summer. I’ve taken time off over the past seven months to focus exclusively on asset management, where I continue to provide extensive commentary. You can find these commentaries on our website, ENRAssetManagement.com, every quarter.
So here I am, back again jotting down my thoughts and writing today about why Chicken Little has got the best of me since early 2009.
How many investment advisors would actually reveal this inner thought? How many would spill the beans on their blog? Well, here I go…
The last four years have been incredibly challenging for most investors. I’m one of them. When factoring in inflation since 2008, most of my investment programs have suffered a loss. Only my precious metals program has posted a net gain, more than doubling in value since 2008.
My benchmark program, the ENR Bullet, is about 7% below its all-time high compared to more than 20% for the S&P 500 Index and almost 30% for the MSCI World Index. That might not sound bad but in the grand scheme of things, it’s a performance record I’m not proud of. Prior to 2008, I rarely suffered a calendar year loss since I started investing in 1991.
With the exception of precious metals since 2009, the S&P 500 Index and even the MSCI World Index have trashed my returns. That’s the first time in any rolling three-year period since 1999 that benchmarks have outpaced my flagship portfolio. Naturally, I’ve been heavily under-weighted stocks over this period.
More often than not, I’ve felt like Chicken Little since 2009, afraid to stick my head out of doors because I’m afraid, sometimes terrified, that the financial skies are in fact falling. And the pressure has been enormous. Investors expect to earn a return – especially when the markets are rising.
I’ve delved deep into the many reasons why I’ve lagged behind global benchmarks since 2009. Fear and distrust of the financial system is first and foremost.
Though I escaped the 2008 market massacre with “only” a 5% loss, I’ve rarely been fully invested since the market low almost three years ago. That’s because I’ve grown incredibly disgusted by Wall Street, the regulators, rating agencies and essentially have come to the conclusion that the entire market is rigged. As the financial markets became unglued in 2008, it occurred to me that I was managing money in a highly unregulated market environment, a casino if you will. The entire system is precariously stacked up like a house of cards. I had to prepare for the worst because I believed the bear would come back eventually and finish the job.
So I turned to managed futures where I already had a big position since 1999. Managed futures saved by tail in 2008 and gained about 18% as a group as markets crashed 40% or more. I became convinced that if the financial system was to survive because of government back-stops, then counter-party risk must also survive. So I stuck only to the biggest custodians and prime brokers in each managed futures fund I invested thereafter.
I also doubled my gold positions around $775 to $875 an ounce. It’s very obvious to me that central banks, led by the Fed, will fight deflation right to the bitter end. They’ll destroy the dollar eventually to grow inflation. I think we’ll eventually have the worst inflation of my generation, or since the 1970s. Too much cash is being created and inflation is brewing like a monster at the Fed and the ECB. I also loaded-up on the gold miners, which are now absurdly cheap following a drubbing in 2011.
Finally, I embraced income. The market will continue to like dividends. So I’m bullish on big global brand-names like Coke, McDonald’s, Pepsi, Heineken, Kraft Foods, Molson-Coors, Campbell Soup, Heinz, etc. These stocks pay a decent yield and should continue to draw investor support amid high volatility and a slow-growing global economy struggling to pare down debt and leverage.
I’m done with most mutual funds or hedge funds. I’m not locking investor capital. Those days are gone. I need liquidity and low fees. Most hedge funds, unlike managed futures, get an F grade in down markets. They’re not hedge funds at all. Most hedge funds have no clue how to sell short and yet they rip off the poor, unsuspecting investor with a 20% incentive fee. What a racket.
Since 2009, my gold and managed futures positions have posted gains but my stocks haven’t fared well, until recently. Also, gold miners were smashed hard last year and most of the top CTAs only gained about 3% to 5% in 2011. In a nutshell, my equity allocation was too conservative. And there’s a reason for this.
In short, I don’t trust the financial system and its conduits of operation. I believe that the post-2008 environment has been a “soft” economic depression supported by government and central bank support.
The average investor is almost guaranteed to lose in the market since the landscape changed four years ago. And no, indexing is no panacea for the small investor because all it means is basically do “average” performance and nothing more. In many ways, indexing has grown into a “bubble” with a ridiculous number of ETFs offering all sorts of redundant investment opportunities. If you buy an index ETF then make sure it pays a decent yield, certainly more than the S&P 500 Index.
I remain under-weighted in common stocks because I’m tired of being bullied by the credit risk still unfolding. In that same light, that’s why I’m heavy in gold and gold stocks. I’m also heavily invested in managed futures that employ a trend-following system. I don’t want to be hostage to the next secular bear market. In fact, I’ve constructed a portfolio that should surge in value when the walls come tumbling down again. If I had to bet, I’d say this will happen in 2013 or in 2014. I think the Dow and the price of gold will cross, perhaps not for long, but they will cross.
The United States is living on borrowed time. It amazes me how the markets still run to the dollar and T-bonds when there’s a crisis; I must be crazy because I don’t understand what the draw is running to U.S. Treasury bonds and the dollar when the same country triggered the ongoing destruction of credit almost four years ago. Yes, there’s liquidity in the dollar. But so what? If there was ever a secular trend that is poised to collapse on its face one day, it’s the dollar-Treasury trade. It’s the same mirage fogging the markets as mortgage-backed securities did prior to their massive blow-up in 2007. The U.S. has literally conned the world.
I know several hugely talented money-managers who’ve left the business since 2009 – just fed-up with the markets. How many times since 2009 have I selected an undervalued or cheap stock only to get sideswiped by systemic or political events dominating the macro environment? It’s exhausting and frustrating.
The super debt cycle that began about 50 years ago has morphed into a time-bomb. I’m not sure which forces of destruction will prevail; either inflation or deflation. If you manage a portfolio then you must diversify accordingly to brace for both economic outcomes. Treasury bonds have been superb deflation hedges and will probably continue to attract haven flows until Europe solves the funding crisis gripping its banks and countries. But at some point in the future that trade will end badly and many people will get wiped out.
I’m still a risk taker – probably greater than ever before. If every dog has his day then I’m hoping 2012 is when managed futures and gold mining stocks thrive. They’re certainly under owned and off most radar screens. That’s not the case with Treasury bonds, REITs and most ETFs.
