Comments on Larry Siegel’s confronting the end of the bond Bull Market

Posted on: 09/29/2014

Charles (Chuck) Self, iSectors CIO, COO

Charles (Chuck) Self, iSectors CIO, COO

by Chuck Self

Knowing Larry Siegel for decades, I am always interested in his insightful analysis.  Currently, Siegel is the Director of Research at the CFA Institute Research Foundation.  I first met him at the Ford Foundation when trying (unsuccessfully, in turned out) to become a colleague of his.  He is one of the few financial academic thinkers that can be thorough yet practical in his analysis and the communication of this analysis. (It doesn’t hurt that he got his MBA four years before I did at the University of Chicago).

Siegel wrote a book review of Simon Lack’s Bonds Are Not Forever.  As usual, the book review is complete with over a dozen footnotes.  Lack previously wrote a book criticizing the hedge fund industry for taking most of the value of their strategies for itself, which is interesting given CALPERS recent decision to liquidate its hedge fund portfolio.  In Siegel’s review, he makes the following points that most financial advisors should consider:

  • A government policy of keeping interest rates significantly below inflation (“financial repression”) is politically popular since debtor voters outnumber those that are affluent savers.
  • When inflation finally happens (and it may take a while; it took over 10 years for the financial repression in the 1950s to catch up with the economy), debtors (both governmental and individual) are happy to pay off their debts with cheaper money.
  • Therefore, inflation is likely and investors will eventually demand higher interest rates.  This makes the bond market an unattractive asset class.
  • Lack’s alternative is a portfolio consisting of cash, dividend and low-beta equities and master limited partnerships (MLPs for both their income and inflation protection properties).

iSectors® recommends that advisors invest a total of 10% to 20% of their clients portfolio in the following allocations in anticipation of coming inflation:

  • iSectors Endowment Allocation reflects much of what is recommended by Lack.  It is composed of a dividend-tilted equity portfolio, a small credit-oriented fixed income portfolio, and a 60% allocation to liquid alternatives including MLPs.  The current yield is 2.3%.
  • iSectors Inflation Protection Allocation that has approximately 25% of the portfolio each in inflation-protected bonds, precious metals, commodities, and REITs/alternatives.  The current yield is only 1.3% but has a low correlation to the stock and bond markets.

Read Larry’s article here > How to Confront the End of the Bond Bull Market

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