I have posted on David Rosenberg before and now he is re-united in the blogosphere with his former colleague from his Merrill Lynch days, Richard Bernstein. Bernstein, who is now CEO of Richard Bernstein Advisors, just released a report on his 11 investment themes for 2011. Rosenberg, who is now Chief Economist & Strategist at Canadian investment firm, Gluskin Sheff, has countered with his 10 themes for 2010.
In the first of a two-part post, I’ll review Bernstein’s 11 themes and in the second post, I’ll review Rosenberg’s 10 themes.
In terms of Bernstein’s 11 themes, I’m going to comment on the first five themes, which I think are the most contrarian. The full list of Bernstein’s 11 themes can be found here [emphasis in the original]:
1. The US Dollar Continues to Appreciate.
Despite all the talk about debasing the dollar, the DXY Index has actually risen about2% so far in 2010. In addition, most investors remain unaware that the dollar troughed in April… 2008! We expect the dollar to continue to appreciate in 2011.
It is true that the dollar struggled in 2008, until the financial panic hit after Lehman Brothers failed. At that point, the dollar became a safe haven in an uncertain world. Since then, when worldwide risk recedes, the dollar falls because investors are willing to take more risk and fairly scorn a safe haven.
Conversely, when Greece blew up and then again when Ireland did the same, the dollar strengthened. For 2010, it has been slightly stronger despite all the gloom and doom. This theme makes sense despite the obvious problems with the dollar because the other major currencies (euro, pound, yen) also have serious issues. Bernstein continues:
2. The US Outperforms Emerging Markets.
Although the MSCI Emerging Market Index has outperformed the S&P 500 so far in2010 (15.9% vs. 11.9%), the gap is smaller than most investors expected at the beginning of the year. Perhaps more important, the S&P 500 has outperformed the BRIC countries (11.9% vs. 8.7%), which few people predicted. Emerging markets are now leading the world in negative earnings surprises and remain very expensive.We expect the US to outperform the broader emerging markets universe in 2011.
Emerging markets — both in terms of stocks and bonds — have been the darlings of this rally and money is flowing into those, often volatile markets. I suspect his theme might be different if he were looking out several years, but as to 2011, this one seems pretty reasonable too.
3. Stocks Outperform Bonds.
Stocks and bonds have performed quite similarly so far in 2010. The S&P 500’s total return stands at 11.9%, compared with the 10.4% total return of the BofA Merrill Lynch 15+ Year US Treasury Index. We expect stocks to outperform bonds in 2011as the US economy continues to expand and as normal upward pressure on longer-term interest rates becomes more apparent.
I think 2011 will be a good year for stocks, particularly in the U.S., so I’m on board with this one. The next theme will be quite controversial. In fact, I’m sure those who are still bullish on gold will deluge him with contrary opinions.
4. Gold Produces a Negative Return.
Gold seems to be in a pure momentum market these days. Momentum markets are exciting, and the media love them, but they have a nasty tendency to fall faster than they rose. The US dollar troughed in 2008, and inflation expectations are not rising in any meaningful way. We think that next year, gold’s momentum market is likely to cede the spotlight to more fundamentally-based assets like stocks.
Even if you believe gold is still in a long-term bull market, it is not unreasonable to have a pullback. Bernstein is correct that, despite all the inflation scares and worries, it has not really come back in any meaningful way. That being the case, one of the major tenets of investing in gold is inflation protection. If, as Bernstein believes, inflation does not roar back, eventually gold investors will realize this.
If you thought his position on gold was dicey, check out this next one:
5. Longer-Term Treasury Rates Rise by More Than 150 Basis Points.
Our work suggests that the economy is just beginning to enter the mid-phase of the economic cycle. The early-cycle was notably anemic because early-cycle industries benefitted the most from the credit bubble, but investors should remember that there is a cycle. Our quick review of longer-term interest rates suggests that they typically increase during the mid-phase by between 200 and 300 basis points. Even assuming weaker-than-average growth next year, longer-term rates are likely to rise substantially…
Bernstein believes the economy will improve and therefore economic activity will pick up. In fact, there are quite a few signs they already have picked up a bit. Assuming this occurs, he see pressures on interest rates and he assumes long-term Treasury rates will rise quite a bit.
I’m not convinced the economy will be as strong as Bernstein thinks it will be, so I am not a big believer that interest rates are going to soar. However, his opinion is not as unlikely as it sounds at first glance.
Take a look at this chart and you can see that 20-year Treasuries were at 5.37% not that long ago, June 2007 in fact. Assuming Treasuries went back up to 5.37%, that would be very close to Bernstein’s 150 basis point increase because 20-year Treasuries are just under 4% now:
Source: St Louis Federal Reserve
If Bernstein is correct that long-term interest rates are going to move up strongly, then bonds and bond funds would obviously take a hit. However, not all bond funds are alike. Those with long maturities would take the biggest hit, but shorter maturity funds and those with more of an opportunistic focus would probably do better.
In the next post on this topic, we’ll see what David Rosenberg thinks is going to happen.
Hat tip: Pragmatic Capitalism
Disclosure: No positions