E.D. Hart

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

Mr. Faber
I will check WorldBeta, thanks of the quick reply.
looking for those elusive numbers....


On Jul 23 02:27 PM WorldBeta wrote:

> Both a strategic (buy and hold) and tactical (using the timing model)
> allocation justifies up to a 20% allocation to gold.
>
> Thanks for the read! And PS, SA only pulls some of my posts, you
> can find them all on my blog World Beta.

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

Mr. Faber,
Great stuff, your posts are one reason I read Seeking Alpha.

It seems that we have experienced a tectonic shift--earthquakes happen not often--but when the do, they are the result of many years of seismic forces building up in the tectonic plate. In a matter of minutes the landscape is changed, something I believe happened in fall 2008.

I was a financial earthquake and the landscape is completely different. People are asking, when will things return to normal? It depends on what you mean by normal. We have seen the results of the seismic shift, but the shift itself is invisible, unlike an earthquake. (My answer is that they will never return to normal--the financial landscape is permanently altered.)

Going forward I expect, significantly lower equity returns, significantly higher inflation, and the gradual erosion of the US Dollar hegemony resulting in re-rating of US Government debt, and much higher interest rates. The economic locus of power will shift to Asia, etc, etc. Nothing that about 10,000 other people haven't already predicted before me.

This begs the question, which asset class can be expected to perform best in such an environment?

One answer I suggest is gold. From a low of $252 on July 20, 1999, to a price of $950, on July, 20 2009--this is a greater than 14% CAGR.


I have pilfered, plagiarized and otherwise stole the following from a Lee Rogers editorial to make my point below:

Lee Rogers
From 1982 to 2000, the Dow Jones Industrial Average went from a bottom of 776.92 to a peak of 11722.98. This represents an annual compound return of 16.8% over the course of 17 years and 5 months. Ironically this rate of return is almost identical to the annual rate of return gold is delivering in its current bull market run. If we say for argument sake that the gold bull market lasts the same amount of time as the previous run in the DJIA from 1982 to 2000, we can project a gold price of $3,736.13 per ounce of gold by 2016.

Gold bottomed at $252.80 on July 20, 1999. 6.81 years later on May 12, 2006 gold peaked at $725 per ounce. This represents an annual rate of return of 16.7% which is only .1% off from what we determined the DJIA’s annual rate of return during its bull run from 1982 to 2000. Based upon the 16.7% annual rate of return this is how we came up with the $3,736.13 per ounce figure by 2016.

Please consider running your numbers with gold broken out as a separate asset class, if nothing else, for curiosity sake. What would a 20% allocation to gold do to a portfolio returns/volatility/Sharpe ratio in sample periods you've already considered?

Thanks for all of your work.

The Road Ahead for Investors

"We cannot be nearly certain that Inflation will return, bonds will decline, and that equities will recover. "

Meant to say, "We can be nearly..."

The Road Ahead for Investors

We cannot be nearly certain that Inflation will return, bonds will decline, and that equities will recover.

Investors confuse risk with uncertainty.

There is much uncertainty in the markets regarding the timing of the recovery of oil prices, but I can be nearly certain that prices will be higher five years from now, just as I can be nearly certain of the recovery of inflation five years from now.

Betting on oil stocks for example is high in uncertainty, but low in risk.
Geoff, great article, as always. Thank you.

Opportunities in a High Correlation World

Great Article Geoff,
I have been a reader of yours for a while and I always appreciate the detailed analysis, and the specific examples. Can you provide us with an update on past suggested low beta portfolios that you've suggested so see how they are holding up in the current environment? Thanks,
Eric

Inflation Fears Are Overblown

The article is not contrarian, but very mainstream. The media is using the bogus government numbers, and swallows the governments party line that although inflation is in a slight uptrend, the expectations going forward are for inflation to moderate.

This is the majority view of the Fed, of Bernanke, or many Wall Street firms, and of the vast majority of media reporting. Then, the author goes onto repeat this mainstream consensus view as somehow contrarian.

In fact, almost everything the author says is incorrect. The contrarian view is that money supply growth has exploded and that inflation going forward will be much worse. This is not reported in the mainstream media, and isn't even acknowledged as a possibility by the fed.

The facts that the author uses to suport his claims are mostly either irrelevant, or incorrect. For example, lack of wage growth is real, but is not necessary for inflation. Wages can rise with very little inflation, and wages can fall in real terms (as they are now) with real substantial increases in inflation.

Globalization is keeping wage growth in check, but global money supply growth is causing global inflation.


Those who think for themselves and care to dig deeply into the numbers, and arent afraid to go very far out against the herd will see that stagflation is a real phenomenon that is likely here, and liikely to get worse. Real inflation is much more than twice what the government reports.

Indexing Our Global Market Portfolio

This is excellent analysis. It refutes what David Swenson of Yale says when he stated recently that the retail investor shouldn't and couldn't do what he does.

Although not precisely the same obviously as the active team that MR. Swneson leads to manage Yales billions, this apporach represents a way forward.

In fact, you present a way, as others have done, for a retail investor to passively allocate assets globally, and rationally. Thanks for the article.