Strategy for a minefield and a public goodbye
Letter from the President
With the Fed preparing to hike in the next six months, we have reached that stage in which the market starts turning into a minefield: U.S. Treasury bond prices now show serious downward momentum, and we expect stock and exchange rate volatility to start to move up.
I reiterate my view that the stock market and the valuations of other risk assets will recover after this bout of what elsewhere I have called the worst kind of volatility (in contrast to the benign sort). My argument is that the Fed will move slowly and keep rates still low for long. Moreover, it will keep its balance sheet unchanged in size and continue to reinvest principal payments from maturing securities in its portfolio. Once investors realize this, in search of yield, they’ll return to risk assets.
To dodge mines in our model portfolios we revise our strategies, selling long-term Treasury bonds and long-term U.S. investment-grade corporate bonds, leaving the proceeds of these sales in U.S. dollar cash. By “cash” we mean high-grade debt maturing in the next 12 months.
We’re also selling U.S. property trusts (REITs), an asset class sensitive to rising rates. We’ll replace them with international (non-U.S. real estate). Recall that in the euro area and Europe and Japan, we expect rates to stay at or near zero for years yet to come.
This move into international real estate has the added benefit that it diversifies portfolios somewhat away from the U.S. dollar. We continue to be bullish on the dollar against the euro, the yen, and emerging market currencies. But we don’t want to stay too long with such concentrated dollar exposure. After all, sooner or later the tide will turn.
A public goodbye
I feel strange, it feels wrong, to be taking his name off our blog entries this week, given how deep is his imprint on our databases and research processes. But alas, he is gone, and should I make a mistake as an author or thinker, I wouldn’t want my error to stain his reputation. Hence wistfully I do remove his name.
Publicly I say to my friend: Thank you, Moisés, for that imprint! And for your friendship. I salute you for your kindness, your work ethic, your emerging skills in economic and market analysis and writing, and for your sheer brain power. Lucky is the team that snatches you up, happy the workmates who’ll count you as a friend.
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