In an environment of deleveraging, and low economic growth rates in the developed world, what asset classes should investors be focussed on? Bill Gross, the Co-CEO of the world's largest bond manager PIMCO, wrote an important monthly note arguing that as we move towards a mildly reflating world (higher rates and credit spreads) investors should add risk assets and move away from negative real returns offered by cash and short-term treasuries. To summarise:
-The current process of financial deleveraging follows a multi-decade period of levering, dating back to the fractional banking system and central banking in the early 20th century, the debasement of gold in the 1930s, the creation of Bretton woods and the dollar/gold standards which followed for 3 decades after WWII, the abandonment of the gold standard in the early 1970s and the deregulation of Glass-Steagall in the 1990s.
-While there were a variety of crises during this period, including the S&L crisis, Continental Bank, LTCM, Mexico, Asia in the late nineties, the Dot-com mania, and the more recent subprime crisis, the system continued to leverage-up as the market participants were emboldened by seeing that policy makers would continue supporting the system by extending credit, expanding deficits, and deregulating.
-The combined fiscal and monetary leverage produced extraordinary returns which exceeded the ability of the economy to create real wealth. Stocks and houses were viewed to be one-way bets over the long-run and homes were even categorised as financial assets (even though they were just a pile of sticks and stones) which could be borrowed against.
-As nominal and real interest rates came down, credit spreads were suppressed by policy support and securitization, stock PE ratios rose, 30-year treasury bond prices doubled, real estate boomed and anything that could be levered did well.
-This process suddenly stopped in 2008 and started to reverse. While the private sector has been selectively delivering (i.e. US households, banks) the public sector continues to pick-up the slack causing the system as a whole to mildly expand leverage, eventually leading to global inflation and slower growth.
-During the period of leveraging, financial assets with long duration (long maturity bonds, stocks, real estate with rental streams) did exceptionally well as their future cash streams were discounted by lower rates and spreads. Wealth was brought forward from future years as real growth was not able to match financial returns.
-Commodities lagged financial assets as well (as they could not be levered and could not benefit from PE expansion) underperforming them by 2% per annum over the last 20-years.
-However, as the process now reverses with rates and spreads not being able to come down further and likely to rise slowly along with inflation, delivering double digit or even 7-8% total return from stocks, bonds or real estate becomes difficult , and relative underperformance to commodities and real assets becomes more likely.
-While inflation will elevate some financial assets like stocks, their ability to return in excess of inflation or nominal GDP growth is likely to be limited.
-The investment strategy for this environment comprises:
-Real asset like commodities (inflation sensitive and supply constrained products) , land, buildings, machines and worker knowledge.
-Developing country stocks, with emphasis on dividend paying rather than growth stocks.
-Higher quality, short duration bonds and inflation-protected bonds.
-Be wary of levered strategies that promise double-digit returns in a delevering world.
-Don't get too defensive – maximise the "risk adjusted carry" or "safe spread" to pay your bills.
-Buy some insurance against fatter tailed outcomes arising from the myriad monetary, policy, geopolitical risks out there and manage investment expenses.
A brilliant snapshot of the financial world we are in and what we can expect going forward. As I have reiterated in several newsletters, it is absolutely critical to construct a well diversified portfolio which provides enough upside under a mildly reflating world and low real growth in developed markets, while protecting against future inflation. A portfolio weighted towards EM equities, energy and commodity stocks, high quality multinational stocks, EM local currency and dollar high yield bonds, high quality developed world credits, cash, farmland and gold should meet these requirements.
Why eating less meat makes sense?:
To follow-up on the newsletter from last week which reasoned how increasing incomes in the developing world are increasing the consumption of protein and putting excessive strain on the finite supply of grains, arable land and water, I present below a report from the Harvard Health Publications (Feb/March, 2012) supporting the case for moderation in meat consumption and more emphasis on plant protein as a means to better health:
-Researchers at the Harvard School of Public Health have been following 85,000 female nurses and 45,000 male health professionals since the mid-1980s. Every few years, the participants fill out questionnaires detailing what they eat and provide other information on their health.
-In one study, the researchers created scores for each nurse's intake of protein from red meat, poultry, fish, dairy, eggs, nuts, and beans. The findings:
- The more protein from red meat, the higher the chances of developing heart disease.
- Women who averaged two or more servings of red meat a day had a 30% higher risk of developing heart disease than those who had one or fewer servings a day.
- Replacing one serving of meat with one of nuts reduced the risk by 30%.
-In a separate study, the researchers created scores that reflected both the amount of carbohydrate in the diet and the main sources of protein. Among the nurses and male health professionals, those with a low-carb diet heavy in animal protein were 23% more likely to have died over 20-plus years of follow-up than those with "regular" diets, while those following a low-carb diet rich in plant protein were 20% less likely to have died.
--The authors of the study suggest that the increased risk from red meat may come from the saturated fat, cholesterol, and iron it delivers. Potentially cancer-causing compounds generated when cooking red meat at high could also contribute. Sodium, particularly in processed foods, may also play a role. It's also possible that red-meat eaters may be more likely to have other risk factors for serious, life-shortening diseases
-Good sources of protein deliver different amounts of saturated fats, carbohydrates, and fiber. Here's what 3 ounces of different protein sources contain.
Food
|
Calories
|
Protein (g)
|
Carbohydrate (g)
|
Saturated fat (g)
|
Roasted chicken, white meat
|
130
|
23.1
|
0
|
0.9
|
Roasted leg of lamb
|
184
|
22.7
|
0
|
3.9
|
Cooked ground beef (85% lean)
|
197
|
20.9
|
0
|
4.5
|
Baked coho salmon
|
151
|
20.7
|
0
|
1.7
|
Roasted chicken, dark meat
|
151
|
19.8
|
0
|
2.1
|
Baked ham
|
151
|
19.2
|
0
|
2.7
|
Boiled green soybeans
|
127
|
11.1
|
10
|
0.7
|
Cottage cheese, 1% milk fat
|
61
|
10.5
|
2.3
|
0.6
|
Boiled black beans
|
114
|
7.6
|
20
|
0.1
|
Source: USDA National Nutrient Database
| ||||
-To your body, protein from pork chops looks and acts the same as protein from peanuts. What's different is the protein "package" — the fats, carbohydrates, vitamins, minerals, and other nutrients that invariably come along with protein. The two Harvard studies add to a growing body of evidence that emphasizing plant protein sources is a better bet for long-term health.
-If you are overweight, shedding pounds can improve everything from your blood pressure to the way you feel. Do it the wrong way, though, and shrinking your waistline could also shrink the number of birthdays you get to celebrate. Instead of having bacon and eggs for breakfast, a burger for lunch, and steak for dinner, getting more of your protein from plants may help you steer clear of heart disease and live longer.
-One way to cut back on red meat is to follow a Mediterranean-style diet. It is rich in plant-based foods, and doesn't emphasize meat.- Eat fruits, vegetables, whole grains, beans, nuts, and seeds every day; they should make up the lion's share of foods.
- Fat, much of it from olive oil, may account for up to 40% of daily calories.
- Small portions of cheese or yogurt are usually eaten each day, along with a serving of fish, poultry, or eggs.
- Red meat makes an appearance now and then.
- Small amounts of red wine are typically taken with meals.
To eating less meat and more plant protein!
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