Thoughts on grey

Last week I highlighted a trio of ideas that I was happy to sit around waiting for; technology, Japan and Brazil.

All three have solid rationale behind them and I’ve acted on one already. I bought the CQQQ ETF; Chinese technology. It’s fallen from its highs but not broken down through the 200DMA so I felt comfortable buying a half of my eventual position (all things equal). Chinese tech is expensive, but so it should be. Here is the one area where I believe firms are able to build the sort of moats or barriers to entry that have long lasting value. Indeed, I would expect to purchase Alibaba as a stand alone stock post IPO.

But the focus on these three opportunities has also highlighted the counter-factual. What if these opportunities do not arise? Technology and Brazil weaken further, suggesting a more prolonged bear market, and Japan does not follow through on more monetary stimulus. More accurately, what if I’m wrong?

When I first considered beginning a portfolio an obvious benefit was understanding that it would teach me the world was grey. My dogmatic views of the economy would be irrelevant in the face of prices going the wrong way.

While it’s something I am still learning to appreciate and optimise, it also turns out that I find this grey-ness relaxing. Economics is often a black and white profession. You’re a bear, or a bull. Or at least that’s the way one can easily be characterised.

For instance, I am a China bull. I would argue there are some nuances to my view, but ultimately I am characterised one way or the other. I like having nuanced views reflected in a portfolio.

(Of course, this does not under-estimate the pressures of being a manager / steward of public funds).

In this context, I’ve been thinking about my EM positions, India and the to-be-added Brazil. To re-state the case, both economies are now in positive-ish reflexivity territory. That is, the market’s helping the economies out. Rates and currencies are stabilising, and while the absolute level of both may hurt the economy, it’s unlikely things will get too much worse. Such is my confidence, I’m thinking about a Brazil short-term debt fund.

Unless, we repeat last year’s taper tantrum.

It’s my view we won’t. The great consensus trade is rising long-term yields. This is where I think consensus is wrong. The conditions for strong growth do not exist. Households remain weak and firm investment growth in 2013 was the slowest since 2009. Given, investment’s starting point is behind the depreciation eight-ball, I just don’t believe the US economy can accelerate, or accommodate too much more labour.

Furthermore, technically it seems difficult to imagine higher rates. If the whole world thinks rates must go higher, then why haven’t they? The US Treasury is in good shape, the deficit’s shrinking and demand for Treasuries remains high. Consensus looks wrong.

This, however, is a bull/bear argument. It’s not one to build a flexible investment strategy around. So I’ll add short US 10-year into my watch-list. My expectation would be to go short at above 2.8%. The tight range since the end of January seems an important technical point at which to re-assess my view. My base case is that this will not occur but I need the flexibility.

Going short must, however, be a starting point. What other opportunities do rising yields create?

One response to “Thoughts on grey

  1. Beware of the troll consensus on rising yields: if you look at market prices (STIR futures or the implied future rates embedded in long bonds) they’re about where they should be (<2 for many years to come in all big currencies), so I think the apparent rising yield meme is actually a minority (in money weighted terms) view, that is having its regulatory moment of fame until the next fad from the vocal but penniless commentariat comes along (remember gold bugs?) .

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