This note was originally published at 8am on March 21, 2014 for Hedgeye subscribers.
“A penny saved is a penny earned.”
I co-chaired the Bipartisan Policy Center’s dinner/debate on America’s Personal Savings Rate in NYC on Wednesday and one of the most thoughtful portfolio managers I know outlined the following to Senator Kent Conrad (ND) and Jim Lockhart (W.L. Ross):
“My wife and I were in the military… we raised our 3 kids teaching them discipline and hard work… my kids all have savings accounts, jobs, and allowances… and my son did pretty well this winter shoveling snow. So I took him to the bank last weekend to make his cash deposit – he looked at his statement and said “Dad, I made 2 cents – why do we do this?”
Very good question, son. With an un-elected Federal Reserve mandate of 0% Rate of Return on American Savings accounts, what is the incentive for the next generation to save?
Back to the Global Macro Grind…
Other than the bond and stock market bubbles blowing up, what is your incentive to be in cash this morning? As I was drawing down the cash position in our asset allocation model yesterday, I reminded myself to say my prayers before bedtime last night.
While prayer is not a risk management process, neither is a country destroying both the credibility of her youth’s hard earned currency and savings rate. As you can see in the Chart of The Day, the relationship between the US Dollar’s value and the ratio of personal savings to after-tax income is as obvious as the sun rising in the East.
Now back to dropping my Cash position to 20% yesterday. Damn the long-standing American principle of Franklin Frugality, Ben Bernanke and Janet Yellen have to be proud of me. With return on savings pinned at 0% and #InflationAccelerating, I’m going to go chase myself some hard core nominal yield!
What does chasing yield mean?
- The “risk-free” rate of return = 0%
- #InflationAccelerating > 2% means your real-rate of return owning 0% is negative
- You have to buy stuff (literally anything) that “yields”> 2%, just to break-even
Otherwise known as a Policy To Inflate, this un-elected and un-constitutional tax policy in America pays the debtor and pulverizes not only the saver, but the poor (hint: inflation is an unlegislated tax). And what does the NY Fed have to say about this? Go eat a REIT.
Seriously, let’s go through what you were forced to do in 2011 one more time, because that’s precisely what I am suggesting you do right now (until one day I say, I’m out, and go to 100% under-my-mattress beast mode):
- FOREIGN CURRENCIES (22%) – with a Down Dollar policy, buy other country currencies vs the US Dollar (Pounds, Euros, etc.)
- COMMODITIES (20%) – since most commodities correlate inversely to USD, buy Gold, Silver, Food – love Coffee!
- FIXED INCOME (19%) – yep, if it’s got a yield greater than 1-2%, giddy-up Bernanke Bond Bubble
- INTL EQUITIES (10%) – we like #StrongCurrency countries. Period.
- US EQUITIES (9%) – slow-growth Utilities, REITS, etc. - love Yield Chasing
Oh, that’s not the asset allocation pie-chart that the Banker-of-bailed-out-America-thundering-turd-high-net-worth-yield-chaser, slash “advisor”, has you in right now? I’m shocked.
With pick-toggles, junk bonds, and MLPs trading near all-time historical multiple highs, I don’t know why the Mucker doesn’t just go whole hog on this asset allocation strategy and go 30% Gold, 70% Kinder Morgan (KMP)!
As long as you realize that investing under this Bernanke/Yellen regime has nothing to do with reasonable valuations for anything that looks like a bond, you’re all set.
Back to the MLP bubble Bernanke will have on his #history watch:
- The US Equity market cap of MLPs 10 years ago was around $50B
- The all-time-bubble-high market cap for MLPs in 2013 was more than 10x that (over $500B)
- The all-time-bubble high in something like Kinder’s KMP in 2013 was 40x earnings
This is why someone like Rich Kinder should be considered a genius – he front-ran both Fed policy and the predictable behavior of human beings being forced to chase yield versus ZIRP (Zero Percent Rate Policy); not to mention the 50% rake he pulls from his LPs.
So, back to the NYC Portfolio Manager – what should we tell his son?
I say we tell him to roll-up some capital intensive assets (snow plows?), play around with the non-GAAP numbers, and collect massive fees from yield-chasing retail investors. Forget long-term principles of frugality and foresight in America. Pay me now. Beats 2 cents.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today – enjoy your weekend,
Keith R. McCullough
Chief Executive Officer