Fellow Chicagoan Steve Cortes, a market maven frequently
seen on CNBC, has a valuable new book out on the current investment landscape
and the investing strategies best suited to it.
His book is titled Against the Herd: 6 Contrarian Investment
Strategies You Should Follow. He
supports each of his theses with a fair amount of facts, figures, and analysis. The book is well-written and easy to follow,
and I find his arguments well-presented.
Cortes thinks that China has peaked and is on the decline:
an aging population, a consumer market that has crested, unsustainable fake, “crony”
capitalism, and a profound lack of financial transparency in its business and
economic data. So avoid China and those
whose fortunes depend on it such as Australia, a major supplier to China of basic
resources, and US exporting firms such as Caterpillar, GM, UTX, and Union
Pacific. Japan is going nowhere but
down, caught in population and sovereign-bond death spirals. Cortes is anything but a gold bug; he feels
if one believes in significant inflation soon to come one should buy the stock
of big multi-national companies with most earnings outside the US (but not primarily
China or Japan, or course). However,
Cortes believes that the US faces a more serious threat of deflation than of
inflation, and he feels housing will not recover any time soon.
Cortes makes a good argument, one to which I already
subscribe, that most individual investors should avoid, or at least minimize, stocks. I wish he could pound that into the heads of
directors of most 401k plans, which offer for retirement investments mostly
stock funds to the exclusion of much access to bonds, bank loans, preferreds,
MLPs, and equity REITS. Cortes says that “In
the last 25 or so years, the cult of equities became an easy sell, because
three massive macro forces merged into a powerful foundation for a secular
rally.... The [current] macro investor,
willing to ascertain trends for what they are, not what we might wish, will
regretfully conclude that macro forces present in the equity boom that
commenced in the 1980s are not only missing now but are very unlikely to
reappear in the coming years.”
Cortes is bullish on the USA and foresees a multi-year rally
for the US dollar, catching global capital too exposed to emerging markets and
not enough in the USA – “In a world awash with risk, beset by inflationary
pressures, and far too pessimistic on America’s prospects, the US dollar
represents a woefully under-owned and under-appreciated asset. I see decades of dollar strength ahead as the
emerging market dream becomes closer to a nightmare.”
Cortes argues that “solid interest earnings represent the best
long-term capital growth strategy – a mix of treasuries, corporate bonds, and
some municipals makes sense for most investors.... Analysts who cite low annual returns for bonds
compare apples to oranges in making analytical mistakes.... In a world of deleveraging and benign
pricing, treasuries will shine.”
Cortes thinks that “treasuries, with no risk, and corporate
bonds, with acceptable risks, should make up nearly all the portfolio for nearly
every investor.” As evident from my
previous posts, most of my allocation is to debt securities (although not
treasuries given their low yield), particularly at this time via a leveraged closed-end
fund vehicle. “Regular” equities, essentially
all via funds, make up less than 5% of my portfolio, but midstream
energy-related firms, mostly MLPs (via CEFs) plus the Kinder entities KMR and KMI, make up
almost 20%.
I recommend Cortes’s new book – well-written, arguments well-supported,
and thought-provoking. It’s helped my
thinking about investing for right now and, no doubt, for the years to come.
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