Advertisement

Three investments to own in our debt-soaked world

There is too much debt in the world, says Tim Price, and not all of it will get paid back. With that in mind, here's how he's investing now.

A man enters the Tokyo Stock Exchange © Kiyoshi Ota/Bloomberg via Getty Images
Japan looks spectacularly cheap

Editor's note: this morning we have a guest post from Tim Price, acclaimed value fund manager and regular MoneyWeek contributor.

"The problem is not so much to see what nobody has yet seen, as to think what nobody has yet thought concerning that which everybody sees." Arthur Schopenhauer.

Inasmuch as we pay any homage to macro-economics, our investment thesis is straightforward: there is too much debt in the world, and not all of it will get paid back.

Advertisement - Article continues below

As something of a film buff, I am fond of citing the 1983 Cold War film War Games in defence of this investment approach: if you don't understand the rules of the game, sometimes it's better not to play.

Why Japan looks spectacularly cheap

No doubt certain traders think they understand why it makes sense to own debt issued by insolvent governments at negative yields (duh! QE!), but we're in the business of capital preservation as opposed to speculating in return-free risk at its all-time highs.

Advertisement
Advertisement - Article continues below

As financial analyst and market historian Russell Napier points out in his Solid Ground newsletter of 19 June ("The jolt of the needle: record low bond yields and the earthquake that follows"), many key government bond yields have fallen below both their 2009 and 2016 lows.

As Napier observes: "As a financial analyst, one is often asked, Where do you see financial bubbles today?' When risk-free rates are this low, it is easy to see them everywhere, but of course the biggest bubble must be in those so-called risk free rates' themselves. Remember these are the risk-free' assets many financial institutions are forced to hold to reduce their balance sheet risk!"

Advertisement - Article continues below

So, absent a modest allocation to near-cash short term government debt, and only the most objectively creditworthy and inflation-linked corporate debt, bonds are basically out.

That isn't necessarily a problem, though, as it still leaves us with a massive investment opportunity set, incorporating value stocks from around the world, systematic trend-following funds, and real assets, notably the monetary metals. (Our best attempt, to date, to solve the riddle of owning a variety of sensible assets that are also uncorrelated against each other.)

For anyone owning listed stocks, at the risk of sounding like a broken record, the really compelling value is still on offer in Japan. As CLSA's John Seagrim points out, Japanese stocks (as measured by the Topix index) are far cheaper in terms of tangible book value (trading on around 1.4 times) than either the S&P 500 (at more than 11 times), or the MSCI Europe (just above four times).

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Yet strip out financials, and Japan moves from being spectacularly cheap to being unbelievably, mind-alteringly cheap. Exclude financials, and against tangible book value, the US trades on 37.1 times tangible book value and Japan trades at 1.67 times. (You can perhaps see why we have more exposure to Japan in our fund than any other market.)

Why I like trend-following funds and gold

Systematic trend-followers (put simply, funds which aim to profit from momentum investing) have admittedly been sub-par performers for some time. But we like the risk/reward.

The risk is that we incur perhaps a few years of relatively modest losses. The reward is that we own vehicles that are genuinely uncorrelated to stock and bond markets and which offer the potential to generate outsized gains as and when substantial price trends emerge (not least on the downside).

Which brings us to "real" assets. If you believe, as we do, that the endgame of this absurd monetary experiment will be a messily inflationary one (albeit perhaps with a dash of deflationary black comedy before we get there), then it makes sense to own an inflation hedge. Perhaps a store of value that has remained such for 5,000 years.

Advertisement - Article continues below

As the good folk at Incrementum point out in their magisterial assessment of prospects for gold, In Gold We Trust, it turns out that gold hasn't been a bad store of value even over the last extraordinary two decades of widespread financial fraud and currency and interest rate debauchery.

And as Incrementum suggests: "The past 12 months have shown that the seemingly invulnerable economic upswing has begun to crack deeply. The worldwide boom, driven by low interest rates and a ceaseless expansion of credit and money, now stands on feet of clay. The probability that the boom will turn to a bust is high, or at least significantly higher than the mainstream assumes.

"The developing political, social, economic, and technological upheavals are enormous. On many fronts confidence in the existing order is crumbling, while the new order has not yet gained enough trust to have a stabilizing effect. This trend will intensify in the coming years.

"In addition, the bubbles in the equity, bond, and real estate markets the Everything Bubble and the corrosive dynamic of over-indebtedness further exacerbate the fragility of markets month after month, week after week, day after day."

As we've remarked, we don't really do macro. Instead, we try and move client capital away from the more obvious red flags and towards the more obvious opportunities displaying high quality, and/or a lack of correlation to traditional markets, and/or otherwise defensive characteristics. Value stocks; trend-followers; gold. So what colour is your parachute?

Tim Price is co-manager of the VT Price Value Portfolio and author of Investing through the Looking Glass: a rational guide to irrational financial markets.

Advertisement
Advertisement

Recommended

James Montier: valuations are way too high
Investment gurus

James Montier: valuations are way too high

The market is completely discounting the risk to the economy and operating as if there is nothing to worry about, pricing in a V-shaped recovery, says…
10 Aug 2020
Don’t dump your dividends
Income investing

Don’t dump your dividends

This crisis certainly does not prove that taking regular capital gains is safer than relying on natural income from dividends.
10 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020
Three mistakes to avoid when investing on Aim
Small cap stocks

Three mistakes to avoid when investing on Aim

Investing in Aim shares can produce spectacular returns. But as Michael Taylor of Shifting Shares explains, you have to have your wits about you.
5 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020