dated 11th July 2016
Despite your risk aversion, you like emerging market bonds. What is the story there?
It is a dollar play. The weaker dollar has been very good for emerging market debt, which is up 12% year to date. We expect the dollar will continue to be weak. For the past year or so, maybe even longer, there has been an incredible correlation between the probability that the Fed is going to hike interest rates and the value of the dollar. The probability of a rate hike is pinned to the ground right now. The market says there is almost zero chance the Fed will raise interest rates through November of this year. The dollar is going to have a hard time, despite the fact that it has been strong recently on the Brexit upset.
How much lower could yields on Treasury bonds go? Could we see a 1% yield?
We just passed the all-time low on the 10-year yield of 1.39%, which we saw in July 2012. It is no surprise the 10-year has been strong after Brexit. I’m not at all convinced that we are going to see much lower yields in the U.S. But even if we do, you’re talking about a de minimis profit. Even if the 10-year yield drops another percentage point, how much will you make? Less than 10%. There are better ways to speculate.
Gold miners have a very high probability—if you bought them today and were disciplined—of making 10%. One of the things driving markets lower is a declining belief in—and enthusiasm for—central-planning authorities and the political establishment. In this environment, gold is a safe asset. There’s an 80% chance of making 10% in gold; the probability of a 10% gain on Treasuries is 20% at best. I’ve never seen a worse risk-reward setup.
That doesn’t make for a very exciting portfolio.
Our portfolios are high-quality bonds, gold, and some cash. People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.