My Sipp: Time to choose if you believe bonds spell disaster

Rob, the long length of your piece summarises succinctly the weakness of your arguement.

If we have a double dip equities will prove a poor choice no matter how well chosen so stick close to the monthly price trends and keep your powder dry. There is a massive buy side industry for equities and none for bonds- make up your own mind on the evidence.

Rob, thank you very much for this excellent article. As usual, you present a cogent and balanced POV.

Ben - are you really highlighting to Rob that there is a large buy side industry? If so, you might want to look at his CV...

An interesting and thorough analysis, which has highlighted the important part which demographics play in determining economics.

I admire the author's positive attitude to investment, however I am already retired, with somewhat different priorities to him.

First and foremost is that I probably do not have enough years of life left to recover from a capital loss if we have to endure a double dip recession.

Secondly, rightly or wrongly, I am of the opinion that a period of deflation will precede inflation.

Thirdly, I have been keeping an eye on the gold price. The London "fix" is exactly that. It's the price the controlling banks would like the PM to be bought/sold at. However trading in forward contracts on the NYMEX suggests to me that they are finding it increasingly difficult to resist upward pressure.

Fourthly, China's stratospheric growth has in part been due to its currency being pegged to the dollar. If this state of affairs continues it will give the Chinese a pecuniary advantage. I don't believe America will stand for it much longer and will issue an ultimatum. Either revalue the renminbi or face quotas and tarrifs on your exports.

It is for these reasons that I am holding 90% cash, 10% junior gold mining shares.

An interesting article that raises some good points to think about, but it certainly wasn't 'thorough'. Equities may look cheap but austerity measures across Europe and the UK have barely begun. I'm also concerned that Asia will struggle should US and Europe tip back into recession or grow at a flaccid 1-2% (I'm sceptical about the Chinese domestic consumption story) . IMHO if you happen to be sitting on a large pile of cash, it's worth waiting for several more data points before deciding where to deploy it. My money remains allocated to deflation now, inflation later thesis (with a modest amount of cash available to take advantage of crashes/slumps/mini-rallies).

There is an additional important element to the argument, which is not clearly alluded to here and that is of the US structural debt e.g. social welfare and medicaid - the demographic timebomb.

These off balance sheet items push the US debt/GDP figure to between 500%-1000% (depending on the assumptions). (See BIS working paper March 2010 on future debt projections of developed economies)

The financial crisis is only the cyclical part of the deficit. The real fun is yet to come.

So the US options are to delever and save more - except that governments and consumers cannot do this at the same time; competitively devalue except that this has political consequences and everybody is trying to do this too at the same time; protectionism; try to achieve inflation; massively cut welfare payments to the elderly; increase immigration to pick up the slump in tax revenues.

Given what we know about the US economy and its policymakers, the global political landscape where surplus countries refuse to give back stolen growth - more QE is inevitable - therefore we will see a UST bubble prior to a ratings downgrade - at which point gold will be left. They'll likely try and impose a tax on that too....

The view regarding the spread between equities and govt bonds must also be taken in context. Firstly, one must use real yields and not nominal. One must also take in to account the fact that quoted P/Es use operating earnings and not reported earnings (which are much lower) and the last ten years (schiller adjusted P/E timescale) have been artificially inflated by cheap credit...

An equity trading range is the best we can hope for. Definitely elevated macro risks at the moment...just look at the PIGS bond spread in the past month and the movement of the Yen. The Greeks also seem to be moving out and dumping in swiss francs (which is a liquidity trap for the banks)

If one agrees that this is a secular bear market, then we could look for an entry point for equities 2015-2018

90% cash is a bit extreme IMO - atleast consider decent global bond funds such as Old Mutual Global Strategic Bond, Templeton Global Bond (they can go long/short)

Nothing like a personal perspective that actually ends with a stated outcome.

thanks rob

Could you all highly intelligent gentlemen advise me if NOW is the time to switc h some equity funds into bonds please?

Many thanks

It depends...on your risk profile..current portfolio...age...investment horizon..frequency of trading, which equity funds you have etc.

That said..a basic answer is that equity markets look toppy..so it might not be a bad time to transfer.

If you are approaching retirement, wealth preservation is the name of the game. Big global imbalances remain, and we will undoubtedly see further blow ups in the years ahead.

So you can dance whilst the music is playing for potentially higher returns, or you can build in a level of protection.

Global bonds only form part of this - you also need to look at gold and absolute return and currency funds, those funds which operate in deeply liquid markets. You could consider Standard Life GARS and Investec for the Gold and currency options (these are just a handful of options)

With regards to global bonds - we will see further lurches between optimism and pessimism. Current expectations are for further US stimulus late this year, or early 2011 in the form of money printing - this will likely favour stocks for a while and not bonds, although this will likely reverse as they will get less growth this time round.

To paraphrase the conditions still look supportive for credit going in to 2011. Beyond that it's likely you will need to be more careful.