Tuesday, April 24, 2007

The Theory of Relativity (on Asset Classes)

It's been wondrous to read and hear recent commentary about the relative performance of asset classes. Jeffrey Saut discussed this in his daily market cast. You can find it here. (1)

Here are the major asset classes
  • Real estate
  • Stocks
  • Bonds
  • Cash
  • Gold
While there appears to be endless commentary on stocks and the stock market, taking a more holistic view of your wealth and your asset class choices is integral to conserving and growing your wealth. Accordingly, the relative performance of one asset class against another is informative and understanding that you have choices is essential to your economic well-being. While the Dow performance seems stellar, Dow performance expressed against the price of oil or the price of gold looks weak. Saut quotes Marc Faber:

“So, we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms. But it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others. This means that some asset classes while rising in value could deflate against other asset classes, such as happened with the Dow against gold since year 2000. I have pointed out in earlier reports that since 2002, all asset prices rose in value. But recently, some diverging performances emerged. Bonds started to decline and seem to be on the verge of a significant long term break down. I have also mentioned in earlier reports that, in times of monetary and credit inflation, such as we have now in the US, bonds are the worst possible long term investment."
I forget where I read it recently, but PIMCO manager sold is CA house and is renting because he believes that prices are going to crash, and he didn't want to hold onto that asset in that area. If you've followed any of my posts on the MBS's, you will find this Bloomberg article confirming some of the items discussed there. None of this is a surprise to me. I've been writing about the bond holders for more than 60 days. Now the mainstream media is starting to write more about these issues. (As an aside, it is worth noting that in Spain yesterday their banks and bonds were hit. Richard Suttmeier has been writing about this for more than nine months. It's a reality in Spain now. Can the US be far behind?). Here is a case where two asset classes--bonds and real estate have been coupled together. MBS Bonds are double-whammied--one from interest rate environment and second from the credit risk environment.

So it makes sense for you to look at your total wealth portfolio and asset classes. If the dollar is losing purchasing power against other currencies, then your USD denominated stock (bond) performance will be discounted. I'm not trying to give any advice, but I do want to create awareness. It has certainly helped me to think about asset classes relative to each other as opposed to looking at absolute performance discrete to a particular asset class.

(1) If you are not a frequent listener, you are missing out on some terrific market commentary. His comments are published in print form, but I don't think there is an archive. Therefore, you should print out (or copy and save into a word file) his commentary.

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