David Rosenberg ? My Love Affair with Bonds is Over
From SIRP to HIRP
Rosenberg said the coming environment will create winners and losers, and owning bonds will be dangerous.
Federal Reserve Chairman Ben Bernanke has said that he is targeting 6.5% unemployment before the Fed begins winding down QE. Rosenberg said that, based on data from the last 12 months, that level would be reached in July 2014. But if there is an improvement in the labor-force participation rate, then it could be by the end of this year.
“I just think 6.5%, my friends, is a lot closer than you think,” he said.
The Fed’s current QE policy would be too radical at that point, and inflationary forces will build, he said.
From a historical perspective, Rosenberg said the last time the U.S. had negative real rates and positive growth was in the early 1970s, when then-Fed chairman Arthur Burns presided over an era of high inflation and rapidly rising rates.
Rosenberg said his firm has been tactically raising cash for clients’ portfolios to prepare for opportunities that may lie ahead. Previously, his portfolios were based on safety and income at a reasonable price (SIRP). His new theme is hedged inflation risk protection (HIRP).
The core components of a HIRP portfolio are:
- Real estate
- Treasury inflation-protected securities
- Art or collectibles
- Gold or silver
- Consumer staples
- Credit arbitrage
- Long-short strategies
- Canadian dollars, Australian dollars and New Zealand dollars
The HIRP theme focuses on companies that have high fixed costs relative to labor costs, such as consumer staples, which also happen to have relatively inelastic demand. Commodity prices (other than precious metals) don’t have a lot of upside, he said, because they are driven more by China than by the U.S. economy.
Rosenberg cautioned against a rapid embrace of HIRP. He said his firm has yet to make any major asset allocation changes based on it. In the meantime, investors will be well served by adhering to his SIRP theme, because demographics will drive the prices of income-generating assets higher.