Today we get to hear from a seasoned hedge fund manager with over a decade of experience in financial planning and investment consulting. The hedge fund he runs is anything but typical—it doesn’t invest in stocks, bonds, or even commodities.
Mark Whitmore is CEO and founder of Whitmore Capital Management, a currency hedge fund. His strategy is simple yet effective: identify currencies that are out of whack with their fair values, then bet on them to return to fair value, which they usually do.
Why currencies? In the first place, the currency markets are the largest and most liquid on earth. Second, over the long term, currencies have little correlation to the performance of stocks or bonds.
That second point is critical, and here’s why: You used to be able to hide from weakness in US stocks by investing abroad. If you expected the S&P 500 to struggle, you could put some money in the Nikkei to diversify.
That doesn’t work so well anymore. Since the world’s central banks revved up the printing presses in unison after the 2008 financial crisis, correlation between developed markets has soared. When a crisis hits, pretty much all stocks fall, regardless of what market they trade on. You can “diversify†into as many stocks in as many different locales in as many different industries as your brokerage account can handle. But you still won’t be truly diversified, because you’ll still own just one asset class: stocks.
(True diversification, by the way, is one thing that will be talked about thoroughly at the Strategic Investment Conference 2014 from May 13-16 in San Diego.
“How do you identify and optimize opportunity in a world that holds unprecedented potential but also significant risks?†is the core question that the SIC 2014 will strive to answer. And chances are that you’ll hear some profound answers, since the conference is brimming with big names like Kyle Bass, Niall Ferguson, Patrick Cox, and Lacy Hunt, to mention just a few.
To read more and register, go on the SIC website.
Back to our friend Mark Whitmore. As you’ll read below, currency investing is one of the solutions to the dilemma of how to properly diversify. Read on for Mark’s fascinating analysis of stocks’ and bonds’ dismal prospects, followed by his specific advice on which currencies to invest in now to both truly diversify your portfolio and generate uncorrelated returns.
Dan Steinhart
Managing Editor of The Casey Report
To read more and register, go on the SIC website.
By Mark Whitmore
We take certain realities for granted—like the reality that nearer events are easier to predict than ones that are further ahead.
For instance, I have been a Seattle Seahawks football fan for 37 years now, as evidenced by my ever-burgeoning amounts of gray hair. Needless to say, their Super Bowl victory was a lifetime sports highlight for me. They are a young team, and their best players are generally signed to cheap contracts for another couple of years. If you were to ask me what the odds are that they will make the play-offs next year, I would say roughly 75-80%.
However, change the time frame, and my response is quite different. If you were to ask me about those same odds for 10 seasons from now, I couldn’t say much above 40%—or just slightly above the 38% odds that any random team makes the NFL play-offs in a given year. There are simply too many unforeseeable variables—like the quality of the team’s future drafts, coaching changes, and management upheaval—that make it impossible to accurately predict the fate of the 2024 Seahawks.
This is consistent with our everyday experiences. Ask someone how likely it is that they’ll be living in the same house six months from now, and he or she will likely respond with a great deal of certainty. Extend that prediction out seven years, and the respondent will be markedly less sure. New jobs, new relationships, family issues, or a variety of other unforeseeable future events could induce someone to move.
Somewhat paradoxically, asset forecasting does not follow this reality. In fact, it’s the exact opposite. Investors who appreciate that fact can better avoid assets that generate subpar returns at best and inflict losses at worst. They’re also more likely to consider investing in currencies as an alternative asset class.
2014—Murky Waters for Stocks and Bonds?
I love watching interviews with Jim Rogers. Almost inevitably, the interviewer will pose a question like, “So Jim, where do you see the price of gold at the end of the year?†His response is almost always the same, some variant of: “how the heck should I know? All I know is that in light of current global financial circumstances, gold is cheap. I continue to hold it, and if it drops in price, I buy more.â€
Rogers, with his vast investing acumen and experience, knows that animal spirits are the dominant intervening variable in the financial markets in the short term. Fundamentally cheap assets can get even cheaper as fearful investors run for the hills, while fundamentally expensive assets can become yet dearer in price as greedy investors pile into them. However, time is the great leveler, humbling the mighty (witness tech stocks in 2000, US real estate and stocks in 2008, and the yen in 2012), while elevating the exiguous (think precious metals fin de siècle, the Canadian dollar in 2002, and commodities in early 2009).
In light of this insight, what are the prospects for the biggest traditional asset pools in North America: US stocks and bonds?
Turning first to stocks, there are those who continue to pound the table for US equities, arguing that they represent good value, even as the S&P 500 reached brand-new record highs last week. Bulls point to the fact that valuations as measured by P/E ratios are much lower than at previous market peaks in 2000 and 2007. Abby Joseph Cohen and her ilk also cite the fact that long-term returns in the markets are higher than average when P/E ratios are low, which purportedly bodes well for US stocks in the future.
