In January of 2007, we made macro predictions about how to allocate assets for the coming 5 years in “Our Investment Calls for 2012.” Overall, our recommendations were pretty spot on as you can see from the table below.
One glaring area though where we were totally off is with interest rates. Boy, were we certainly way off in judging Bernanke. With inflation at ridiculous levels and the Fed hell bent on cutting rates even further, real rates of interest are currently negative and getting worse. Another speculative and large bubble is forming in “risk free” and other bonds largely due to the fact that institutional investors are focused on principal protection and have limited other options. Ironically, these “risk free” bonds are getting riskier by the day with the massive government nationalization/intervention effort.
Amazing today with gold breaking the US$1,000 barrier and oil at $111, S&P comes out and says that the “end of writedowns are in sight.”
Definitely some interesting plays can be made with this total disconnect. We are still very short US financials including investment banks, commercial banks, mortgage insurance companies, rating agencies, and select other targets.
| January-07 | March-08 | % Change | |
| Precious Metals | |||
| Gold | $625.00 | $998.10 | 59.7% |
| Silver | $12.53 | $20.73 | 65.4% |
| Energy | |||
| Oil | $44.00 | $109.79 | 149.5% |
| Natural Gas | $6.50 | $10.21 | 57.1% |
| Soft Commodities | |||
| Corn | $408.25 | $574.75 | 40.8% |
| Coffee C | $121.65 | $157.85 | 29.8% |
| Lean Hogs | $64.97 | $72.65 | 11.8% |
| Soybean | $714.75 | $1,418.00 | 98.4% |
| Cotton | $54.92 | $80.81 | 47.1% |
| Live Cattle | $94.18 | $90.98 | (3.4%) |
| Wheat | $464.75 | $1,240.00 | 166.8% |
| Sugar #11 | $10.91 | $13.59 | 24.6% |
| Orange Juice | $200.45 | $118.50 | (40.9%) |
| Cocoa | $1,606.00 | $2,922.00 | 81.9% |
| Interest Rates | |||
| Federal Reserve Target | 5.25% | 3.00% | (42.9%) |
| 3-month Libor | 5.36% | 2.80% | (47.8%) |
| Prime Rate | 8.25% | 6.00% | (27.3%) |
| 15-year mortgage | 5.51% | 5.28% | (4.2%) |
| 30-year mortgage | 5.74% | 5.95% | 3.7% |
| 3-month Treasury | 5.10% | 1.33% | (73.9%) |
| 5-year Treasury | 4.78% | 2.45% | (48.7%) |
| 10-year Treasury | 4.74% | 3.48% | (26.6%) |
| 30-year Treasury | 4.83% | 4.40% | (8.9%) |
| Source: Bloomberg |
