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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