Juggling Dynamite

An excellent piece was sent to me on the weekend from Bradley A. Jones, analyst at Deutsche Bank, entitled Rethinking Portfolio Construction and Risk Management.  A valuable read free from the everyday shark chum so ubiquitous in portfolio management theory.  Great points and excellent charts. (It also amounts to a wonderful summary of why we manage money the way we do at Venable Park). You can read the whole 60 page report here.  Here are his Concluding Remarks:

Evolution Ahead in Asset Allocation. The 60/40 Policy Portfolio, still the industry default setting, is far riskier than most think:

• It is subject to unacceptably large and lengthy drawdowns/shortfall risk.

• Has substantial embedded correlation risk (based on statistical/economic factors)

• Ignores regime dependence, and is ill-equipped for a ‘stag-lite’ macro environment

• At current valuation levels, offers virtually no prospect of realizing returns in line with the long-term average of 4% p.a. in real terms (more likely 1% p.a.)

Good stuff.  Quite a breath of fresh air.

This clip was recorded a year ago, but the comments remain pertinent today.  One comment I disagree with is Hudson’s idea that only a democrat could have got Ben Bernanke re-apppointed as Fed Chair.  After all, it was Bush and company who appointed ‘the Bernank’ in the first place.  As I wrote in my book Juggling Dynamite, “spendthrift governments must maintain excellent relations with their bankers”.  Lack of fiscal discipline on all sides of the political spectrum has created our current malaise.

“The New Junk Economics: From Democracy to Neoliberal Oligarchy” with financial economist and historian, Dr. Michael Hudson. We discuss the Federal Reserve; money as debt; Fed Chairman Ben Bernanke’s misconception of the causes of the great depression of the 1930′s; classical political economy versus anti-classical, so-called “neoclassical”, economics; the labor theory of value; the dollar carry trade; government deficit spending; Greece.” Listen to the 50 minute audio clip here.

With the extreme swings we have lived through over the past couple of years it can be difficult to get a cogent view. Sort of like holding a printed page at the end of your nose–you can see writing but you can’t grasp the point. This chart of the past 4 years in the TSX 60 (XIU) offers some clarity.

We can clearly see that the bulk of the cyclical rally off the ’09 lows came freakishly fast in 14 months, with a 65% gain from March 2009 to May 2010 on massive global fiscal and monetary stimulus.  After that the market faltered listless for six months before breaking into another 16% up-leg on the next round of monetary juice via QE2 from November 2010 to April 2011.  Since then amid all the noise of hype and hope, the TSX has faltered again, giving back to date, nearly all of the QE2 rally over the past year.  Where to next oh fearless leader?

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.