In the past few weeks, Dan Denning has sat down with our two senior investment analysts and commentators. Gold, negative interest rates, bonds, a cashless society. It’s all happening.
Below, you’ll find highlights from conversations with Charlie Morris, the investment director of The Fleet Street Letter, and Tim Price, from the London Investment Alert and The Price Report. If you prefer to watch the interview with Tim, you can do so here on YouTube.
Also, Nick Hubble and me joined Dan on the podcast Thursday. You can listen to that here. We talked about the big stories of the week. And we announced a new partnership to save capitalism in Europe. Listen to the podcast for details!
Charlie Morris: bonds are the greatest threat to your wealth
Charlie Morris is chief investment officer of The Fleet Street Letter. He has managed billions of pounds for clients over a 17-year career.
What’s the biggest threat to your wealth? Government bonds, says Charlie.
Money managers usually hold bonds for their clients – around 15% of their entire portfolio. It’s not because bonds are especially attractive … it’s just the way that things have always been. A “balanced portfolio” includes government bonds.
Charlie’s not so sure that bonds are safe.
“They don’t offer you the protection they’re supposed to,” he warns. “So why would you have so many in your portfolio?”
So where do you go for safety? Blue-chip stocks, particularly consumer goods:
“Our consumption of consumer goods doesn’t change in a recession. We don’t buy less shampoo in a recession and walk around with greasy hair. And similarly, during a boom, you don’t buy twice as much shampoo…
“That’s what makes consumer goods companies into wonderful, long-term, defensive stocks. And indeed, that is a part of The Fleet Street Letter portfolio.”
What else is Charlie recommending for “defensive positions?”
“The second part is ‘deep value’ – companies who are disliked or ignored by the market. And the third part is the ‘best of’ in the financial sector, which is how I would describe reinsurance companies. That’s a Warren Buffett-style investment.”
Why the reinsurance market?
Here’s an excerpt from Charlie’s latest note on the subject:
- This isn’t a proxy for the insurance industry, which is poorly run… This market is so attractive because there is so much diversity and, outside of areas such as home and auto insurance, pricing of complex risks is negotiated face-to-face. Attempts to automate this market haven’t worked; that’s why the good underwriters have a lasting edge.
Charlie believes the stock market could still go up as investors take their money out of bonds.
“It’s not obvious that the stock market is going to collapse in the Western world… Money has to go somewhere and the bond market is running out of room at these yields.”
You can listen to this conversation between Charlie Morris and Dan Denning for yourself here.
Tim Price: central banks are “subverting economic law”
Dan also sat down with Tim Price, who writes the London Investment Alert and The Price Report.
He’s a 20-year veteran fund manager of the City.
The Bank of Japan has joined Switzerland and Sweden in taking their rates negative in an effort to support growth.
The extraordinary monetary stimulus and experimentation we’re seeing in Japan could be a “testing ground” for what central banks will do in Europe and the United States.
“They’re basically subverting economic law,” says Tim, pointing out that by buying their own bonds, they’ve driven down the interest rates on government debt in Japan – despite the vast oversupply of government debt being emitted.
“What we think is going on is that ‘Abenomics’ is explicitly designed to drive the stock market higher. And that will lead to some kind of magical trickle-down effect. I’m not sure if anyone believes that anymore, but again that’s what we think is the objective.”
Tim points out that in the US, low interest rates have succeeded in driving the stock markets higher – so that shares are priced well beyond underlying values:
“In the first three quarters of 2015, S&P 500 companies paid out US$720 billion in stock buybacks. They only made US$600 billion in earnings during that period. So you’ve got an insane buyback mania in the United States… ”
In comparison, the effect of “Abenomics” on the Japanese market is just beginning.
“Buybacks and investor payouts are going to go up in Japan. Companies are already sitting on about US$1 trillion in cash. So ‘Abenomics’ is… likely to give rise over time to a healthier stock market.
“The ‘wild card’ is in the bond market, which is utterly unsustainable. In the words of well-known investor Kyle Bass, Japanese bonds are a ‘bug in search of a windshield.’”
Those negative rates have already started in Europe, since the European Central Bank took rates negative a year and a half ago. This policy could go worldwide, warns Tim.
But as Dan asks, why try a policy that has failed to create growth in Japan for the last 20 years?
“I think the reason they’re trying is that nobody has really accepted that neo-Keynesian economics have failed. The beatings will continue until moral improves. There is a compete vacuum of ideas at the heart of central banks and Western governments.”
You can catch the full conversation right here.
Category: Economics