McKinsey Global Institute is one arm of the highly respected McKinsey & Company, which is sometimes referred to as the rich man's IMF. This attribution is not because of dollar values, but because they are problem fixers who don't carry the stigma of being advised by IMF. A good friend worked for them in Korea in the late 90's where they were hired as part of Korea's workout after the Asia Crisis of 1997-9. Not that McKinsey solved it unaided, but they were a major contributor to Korea's recovery.
McKinsey has recently released a reworking of their firm's analysis of the de-leveraging process and probable time course for developed countries, and those impacted by them, since 2007-2009. Much is based upon the historical research published in the past few years, some of which has been discussed here. You can read a summary https://www.mckinseyquarterly.com/Working_out_of_debt_2914 or at http://www.johnmauldin.com/outsidethebox/?tm_source=newsletter&utm_medium=email&utm_campaign=outsidethebox .
Basically it's going to take longer than most people think to emerge from the credit crash. You know my bias is that currency debasement will result in continued dollar inflation, but I have been acknowledging that there is also at the same time a deflationary force in the public sector. McKinsey fleshes this out.
David Rosenberg ex-Merrill Lynch and now at Gluskin Sheff in Toronto has neatly outlined the investment implications of a McKinsey style world: http://www.zerohedge.com/print/443141 In an email to a friend I distilled what I see as a practical portfolio based upon some of Rosenberg's ideas for a typical private portfolio, in my case for a retired investor. In fact it's not too far from my current portfolio. In one sense it could be a "set and forget" package, but it could be traded as desired in several particulars.
"Rosenberg always sounds fresh, and I keep learning from him. Three of his list items make lots more sense to me all the time:
"2. Deflation trumps inflation as the primary trend in a deleveraging cycle. This means an emphasis on defensive sectors with earnings stability and predictability characteristics. It also means a focus on squeezing as much income as possible out of the portfolio. This is why "income equity" strategies make so much sense." To me this means keep and thoroughly appreciate and enjoy the annuitites and the IRA's which are still shelters."Income equity" strategies means investing in a spectrum of long stocks/short options vehicles. I have 3 closed-ends which do this: ETV, EXG, and GGN in mostly US, mostly non-US and gold and other resourcestocks. CEF's doing this can be traded across a volatility and discount narrowing range in non-taxable accounts. CEF's don't have to liquidate their holdings to buy out their shareholders in a rout. The shareholders liquidate themselves which gives us the tradeable panic volatility excursions. ""5. In this post-bubble environment, policy rates will remain near the floor for years. As such, the risks of any sustainable bear market in bonds are very low since the cost of carry is so vitally important to the fixed-income markets, especially for longer duration product (keeping in mind that yield curves are still steep by historical standards)."" Excellent idea along black swan lines. Keep most of your money liquid, but put a meaningful portion in leveraged long tbonds. My favorite is Vanguard's EDV, but WHOSX is very good or any low cost long term treasury mutual. These also do well in tax-sheltered accounts. you could do the same with munis for taxable accounts,,,,the same yield curve aberration. ""6. Keeping policy rates low means that real rates will remain negative. Even if the CPI turns negative, the central banks around the world will de facto ease policy by printing money. In this sense, the secular bull market in gold bullion remains intact and, as such, dips should be bought (especially dips below the moving averages)."" and..... ""7. Global deleveraging cycles almost invariably bring on heightened geo-political tensions. This is why the oil price has such a high floor established underneath it. Protectionism will continue to emerge as a new normal, as part of the globalization trend gets reversed. Exposure to crude oil and materials makes good sense from a strategic point of view."" These are one and the same idea and speak well for themselves. A good portfolio could be 70% tbills or short term TIPs bonds, 10% buy/write equity funds, 10% long term treasuries, 5% gold, 5% commodities or just 10% gold. This would be good for anyone over 50-55 years of age. All are thoughts incorporating both the deflationary and inflationary aspects of current reality within an income portfolio. Read the McKinsey and Rosenberg articles for background and detail.
Recent Comments