October 16, 2020
By Steve Blumenthal
“The 60% stock / 40% bond portfolio is largely a relic of the past,
with alternatives likely to become a bigger portion of investors’ portfolios
over the next decade, asset management chiefs said during a
panel discussion at the Milken Global Institute Conference on Wednesday.”
– Reshma Kapadia, “The 60/40 Portfolio Is Dead. Here’s What Will Replace It,” Barron’s (Oct. 15, 2020)
Here’s the math: 60% allocated to the S&P 500 Index equals 60% times 5.70% equals 3.42%. 40% allocated to 10-year Treasury Notes equals 40% times 0.74% equals 0.296%. Added together you get a 60% stock / 40% bond return of 3.72%. That’s on the optimistic side.
I say optimistic because I’m using the high end of Vanguard’s recent 10-year forecast for large-cap U.S. stocks. In their October Market Perspectives letter, they are predicting 3.70% to 5.70% annualized. That seems high to me in comparison to GMO’s 7-year Real Return Forecast of -5.80% per year, Ned Davis Research’s various 10-year forecasts of 0% to 3.36% (essentially earning the dividend yield), and John Hussman’s 12-year forecast of slightly negative returns. Let’s say the range is 0% to 5.70%. Either way, a 60% stock / 40% bond return of 3.72% is unlikely and not what your clients are expecting.
Perhaps that’s why the asset management chiefs at the Milken Conference suggested alternatives become a bigger portion of investors’ portfolios. That makes sense to me.
What do alternatives look like? On the fixed-income side, we are looking at a 7% to 10% yielding income fund secured by pharmaceutical royalties and other income plays; however, one must be an accredited investor, gain access and conduct proper due diligence. Portfolio sizing is paramount.
Another idea is a portfolio of high and growing dividend stocks. Our portfolio yields approximately 4.5% and we believe those dividend payouts will grow over the coming 10 years. The point is I believe you can do better than 3.72%. While there will be volatility over the coming 10 years, we believe it is a better alternative to bond investing that will also be volatile over the coming 10 years on the way to that 0.74%.
Further, there are better weighting processes compared to capitalization weighting and innovative ETFs that can hedge downside risk exposure. Also, we like diversifying to select trading strategies for a portion of a portfolio. So, the idea is to not get depressed. Just think differently.
Each month I like to look at various coming equity market return forecasts. You’ll find a select few of my favorite charts below. Hint: grab a hot spiked apple cider before reading. No real change in the forward outlook probabilities.
The other share with you today is a podcast from Grant Williams. I downloaded it and listened to it yesterday on my flight home from Oregon. Grant interviewed Felix Zulauf. Zulauf, as you likely know, is a global macro investor, meaning he invests globally trading currencies, fixed income, equities, commodities, and metals. He believes we are in a totally different environment than what we experienced the last 10 years and favors trading and risk management over traditional buy-and-hold.
Big picture, he believes globally it looks like this:
It seems that the government’s share of our economies will continue to rise or stay very elevated for much longer than many had assumed. Our economies are becoming more state economies with central planners trying to manage them. They will fail over the long term, but this set-up may be bullish for selected risk assets and before the long-term negatives hit.
Keep that quote in mind as you think about your portfolio construction. Going into 2010, 10-year government bond yields were 3.86% and the forward return outlook for equities was in the low to mid-teens (then we were coming out of the housing crash and the Great Recession). Our starting point today is vastly different. The next 10 years will look nothing like the last 10 years.
Below you’ll find the link to and summary of Grant Williams and Bill Fleckenstein’s interview of Felix Zulauf. By the way, Felix writes an excellent institutional research letter to which I subscribe. (You can learn more by emailing my friend Jennifer Mendel at firstname.lastname@example.org.)
I conclude this week’s piece with a few photos from my bucket list trip to Bandon Dunes. Four courses in three days. I’m not sure I was fit enough for the 36 holes on Tuesday. My turn faded and score rose, but spirits remained high. And I share a fun story of a hole-in-one made by a dear friend. Bucket list indeed.
In chair with coffee in hand? Let’s go. Read on and have a great week!
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- Valuation and Forward Return Charts
- Grant Williams/Bill Fleckenstein Podcast Interview of Felix Zulauf
- Trade Signals – Major Indicators Remain Unchanged
- Personal Note – Ace
To transcribe the podcast, I used a new tool that converts audio to text, so please excuse the few errors you’ll find in the intro that follows. It will give you a feel but do listen to the podcast for the full interview. It’s worth it, I promise. Ok, let’s go.
Grant Williams – Introduction: For those of you who don’t know, I don’t know how you wouldn’t, because you would have seen him on the title of the podcast. But the great Felix Zulauf is going to be joining us shortly. And Felix is, to my mind, one of the best macro thinkers in the world. And he’s been around for a long time, he was a member of the Barron’s Roundtable. And he has his own consulting firm out of Switzerland. And if you, if you haven’t checked this work out, please, please do so. Felixzulauf.com.
I’ve spent many hours talking to Felix in the past. And every time I do, I come away with a wealth of new things to think about and new ways to think about things that I thought I already understood. So, I’m really looking forward to this conversation today.
Well, Felix, welcome to the podcast. So good to see you. Again. It’s been a while my friend.
Felix Zulauf: My pleasure, thank you very much for having me on your podcast.
Grant: It’s a very different world from the one you and I kind of were looking at the last time we had a chance to chat. And really, what Bill [Grant’s co-host] and I are trying to understand is while the world outside finances is very, very different, in many ways, the world inside finance is boringly the same more stimulus, more government programs, more checks more debt. And we’re just trying to get a sense of you know, what comes next? And how do we transition from here to there? And what does it look like? So if you’ve been someone who has been exceptionally appreciate in calling big secular terms, and so I just wanted to kick off if you if you feel as though we’re approaching any of those in any particular places in the world you look at? And if so, what what’s on your radar?
Felix: Well, I, I do not know the future, of course. I think about it, I think about it, and I do believe we are trapped, because based on the demographics we see in the OECD countries plus China, it’s impossible to create the economic growth that the system needs to function properly, for the next five to 10 years, or whatever.
So something has to happen. First, we have tried to devalue currencies, we have tried to bring interest rates down to zero or below by monetary stimulation, nothing worked. We didn’t have the economic growth we needed. We didn’t get the inflation, we needed to get the debt down relative to GDP and all that sort of things. Now, we bring on the fiscal side, I believe, so far, what we see on the fiscal side is gigantic.
But it’s not stimulus, right. It’s support, but it’s not stimulus. Most people misunderstand that. The current fiscal support is simply replacing most of what has been lost in income by the corporate and the household sector. And it’s not more than that. I think they have to do more than that.
So today, the Financial Times quoted, the OECD and the IMF calling for more fiscal stimulus to bring economic growth along and I think they will eventually do a lot more. If you do not have the fiscal stimulus is needed, then there is no way we can save our system as it is. If they bring on stimulus as is needed to create the growth. Then, of course, that government that explodes to even higher level and not only government that explodes, but also the government share of our economies in the second quarter for the year.
As economy, government share of GDP, nominal GDP, jumped from the mid 20s, or what it was, to the upper 40%. In, in Europe, you know, the Eurozone on average has about the government share of 50%, the France is very high up with a few Scandinavian countries 55 and 58%. And, and I think that share has jumped by another 10%, at least, if not more.
So that means the government share is already bigger than the private sector in those economies. And that’s what I’ve been calling for quite some years that we are moving into a planning economy. It’s government led, it’s government manipulated, it’s government intervened, the free market, these pushed out, and the planning. And the planning guys are running the show.
The fiscal authorities, the governments, as well as the central banks, they work together, and they are running the show, this is what it is, we lose our freedom, because when they do that, you get a lot of unpleasant surprises.
And of course, those unpleasant surprises cannot be and therefore they manipulate and intervene more, they regulate more, and they dictate more, etc., etc.
In a situation like this, when you go through history, you usually end up in hyperinflation. And then the monetary policy for the demographics we have, it’s very difficult to create the hyperinflation. They have tried now for some years, once we get up to 3.45% of inflation, if they can achieve that, then there is a chance that we could have a much higher inflation, when the central banks begin to directly finance the governments, as the Brits have announced, they are doing, and some others are doing as well. Brazil, I think is another one.
So the vehicle is structurally weaker economies like Brazil and Turkey, etc., they will most likely run into a hyperinflation. I’m not sure the industrialized economies can achieve that.
What is more likely, in my view, and I’m not 100% sure about that, I think they will, at some point, try to get rid of cash money, paper currencies, make all the money electronic, and then they can guide us through monetary form.
We do not know how it looks like. But the bottom line of that will be that a lot of people we lose a lot of money. That’s for sure. Those who are stuck with nominal with nominal investments, they will lose a lot of money. Those that are invested in real assets may do better, or will do better, but they will also lose money.
So I think there is no winner coming out of this. And if you knew exactly what the authorities would do, and you did the right thing, and you came out as a big winner, I guarantee you that all the profits you made would be taxed away by the authorities.
So there, there is no real winner coming out of this, all you can do is lose less than others. That’s how I see it over the long term. And I think the situation is not just economic, you know, it backfires into the social arena, of course, it becomes very political, because the policies that they are applying, are really creating a bigger and bigger rift between the haves and the have nots.
And these leads to ever more socialist policies and redistribution policies, etc., etc. And that, in turn, makes the whole system less efficient and makes the whole economy less prosperous. And therefore, we are all losers. We end up in a in a race to the bottom, so to speak.
[SB here: If that didn’t depress you I’m not sure what will. Keep an open mind. It’s important to listen to different views. Felix is brilliant. Just take the data in and keep positive.]
Click below for the full podcast.
October 14, 2020
S&P 500 Index — 3,515 (open)
Notable this week:
The equity and fixed income trade signals are essentially unchanged since last week’s report. To many observers and participants, the markets continue to react to the current news cycle, including the election, COVID-19 vaccine development, the status of congressional negotiations of another stimulus package, corporate earnings, prospects and timing of a US economic recovery, etc. (You know, inconsequential stuff.)
We note that Ned Davis Research’s Daily Trading Sentiment is “Extreme Optimism,” which is short-term bearish for equities.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
“You will grow in amazing ways when you don’t see yourself
as a victim of circumstances but rather someone who overcomes
your circumstances to make a positive impact on others.”
– Jon Gordon
I promised a few pictures from Bandon Dunes. We flew in Monday morning and played four rounds in three days. The company was fantastic and the “ace” hole-in-one for my good friend, Andy, on the 130-yard par three with the Pacific Ocean behind the green was priceless.
Golf Digest puts the odds for a tour player making an ace at 3,000 to 1. Rounds needed to play to do it: 900. Odds of a low handicapper making an ace 5,000 to 1. Rounds needed to do it: 1,250. Odds of an average golfer making an ace 12,000 to 1. Rounds needed to do it: 3,000. Let’s say the average golfer plays four rounds a month and 30 to 40 rounds per year. You get the picture… not easy to do.
Andy is like a giant happy pill. Always upbeat, positive, and fun to be around. He is a 9/11 survivor and a cancer survivor (believed to have originated from that horrific day). He epitomizes the quote above.
This is what I loved most. We couldn’t see the ball fall into the hole from the tee box. After he hit his pitching wedge, he immediately yelled, “That’s in.” The thing is, he always yells “That’s in” after a good shot on a par three. We walked to the hole and couldn’t find his ball. Andy was on the backside of the green when one of the caddies looked in the hole. And there it was. Normally there is a scream and a jump in the air. Knowing Andy, that is what I expected. We cheered, he smiled, and as he stepped to the side of the green as we finished putting, I watched him go to another place. A very private happy place. It was so nice to see that. I don’t think he came back to the ground for another few holes.
We celebrated with beers afterward then rushed to the airport to head home. A bucket list day indeed. Here are a few shots and one video to give you a feel. Paradise found!
And here is the ace:
The final story is about coaching. One of my new friends from Bandon Dunes is E3 Wealth’s Bruce Wehner. Bruce is a former high school golf coach. You do get to know people better when you walk for four hours with them. I enjoyed how much he enjoyed working with kids. My comment to him was that the most influential people in my life were my coaches. A hat tip to Coach Bruce. And a giant thank you to Joe Quartucci, John Moriarty, Steve Holland and Terry Taylor for inviting me to join you. What a memorable few days.
Finally, Monday begins the Malvern Prep Friars boys’ soccer season. Delayed by Covid-19, my favorite coach in the world (wife Susan) begins her second season coaching the team. I’ll be masked up in the bleachers rooting them on.
Susan shared the above quote with me this morning.
Call an old coach or two this week and let them know you’re thinking about them.
I hope you have a great weekend. Stay healthy and safe!
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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