Tuesday, October 18, 2011

Dinner Saturday Evening

Ok so Saturday I went to a dinner party in the Laurentians (North of Montreal), the weather was simply terrible, BTW now used to GPS, not having one at hand is a complete nightmare, using Maps in the car is dangerous (especially when driving alone, at night in the rain).

Anyway, I arrive at the dinner and meet a bunch of new people, very pleasant, lots of wine being drunk, having a ball no doubt about it.  One of the guest, is a big cheese in one of Montreal's premier money mangers (didn't know that at the time), anyway I speaking to our host and explaining that the market is largely rigged against the small, that the market is in a secular bear market (because of demographics and deleveraging) and that the model portfolio today should include lots of fixed income and stocks that pay high dividend and that are counter cyclical (or at the very least not related to consumer discretionary businesses).

Not making a big fuss about all this, but I do point out that most of the trading floor participants (my colleagues) are very heavy into fixed income (and relatively light in equity -- our big long is stock grants for bonus payments).  This guy jumps in, and echos every thing I've said to my friend; the problem with these things is that they become echo chambers very quickly -- especially when contrarians meet (so I try to steer the conversation towards other topics -- largely successfully).  However, much later in the evening this guy corners me and asks me what is my investment strategy:  I tell him that about a year ago; David Rosenberg of Gluskein Sheff wrote a very interesting note on investment strategy in a bear market -- and that I have been following his advise:

  • Invest in what you know and understand
  • Buy "good" yielding average duration fixed income security from Canadian corporation
  • Stay away from consumer discretionary stocks
  • All stocks should be with high dividend (demographic reasons -- retiree want income so these stocks will be more popular)
  • Balance should be 60/20/20 Fixed income/Stocks/Cash.

That's what Rosenberg suggested.  I told my new friend that there's nothing really magical about this strategy.  What was amazing was that when I said this everyone became quiet, I don't think I revealed any great secret, in fact, this is relatively pedestrian as a strategy. 

Then I was asked what I though was a worse case scenario:  So the Europeans cannot get their act together and following another liquidity crisis, European banks start liquidating assets, causing a panic, forcing the ECB to step in declare a bank holiday and take over the banks...(I said a worse case), the deeply integrated financial system grinds to a halt.  As the American banks are faced with their own liquidity crisis (as European banks shut down), this transfer itself to Canada -- because as a major trading nation (with America in particular), the Canadian banks face the same liquidity crunch.  BTW, at the same time the European are shedding "non-core" assets in a bid to improve their capitalization (as the equity markets are now shut), pushing asset prices lower.  Massive deflation -- there is a real risk of liquidity freeze up here -- you know you go to your ATM and nothing happens (I said worse case).  

After the deafening silence, I was asked what I though the probability of this happening (I think less than 5%).  I keep on hoping that European leaders will see the light.  However, the FT had a fascinating article about Europe.  The FT's thesis is that European bureaucrats are essentially the product of small open economy mentality (like Canada) but Europe is a large and closed economy -- much more closed than America.  Their prescriptions are for small independent open economies, which do not work in a large and closed economy...grime hope indeed!


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