You may have heard of GARP: Growth At A Reasonable Price, a philosophy or strategysome used to invest.
David Rosenberg of Gluskin-Sheff today explains his counterpoint: SIRP: Safety and Income at a Reasonal Price.
My primary strategy theme has been S.I.R.P. (Safety and Income at a
Reasonable Price) because yield works in a deleveraging deflationary cycle. Not
only is there substantial excess capacity in the global economy, primarily in the
U.S. where the “output gap” is close to 6%, the more crucial story is the length of
time it will take to absorb the excess capacity. It could easily take five years or
longer, depending of course on how far down potential GDP growth goes in the
intermediate term given reduced labour mobility, lack of capital deepening and
higher future tax rates. This is important because what it means is that
disinflationary, even deflationary, pressures will be dominant over the next
Moreover, with the median age of the boomer population turning 55 in the U.S.,
there is a very strong demographic demand for income and with bonds
comprising just 6% of the household asset mix, this appetite for yield will very
likely expand even further in coming years. Within the equity market, this
implies a focus on squeezing as much income out of the portfolio as possible, so
a reliance on reliable dividend yield and dividend growth makes perfect sense.
We are in a period of heightened financial market volatility, which is typical of a
post-bubble deleveraging period when the forces of debt deflation are countered
by massive doses of government reflationary polices. This to-and-fro is the
reason why in the span of a decade we have seen two parabolic peaks in the
equity market (September 2000 and October 2007) and two depressed bottoms
(October 2002 and March 2009). As I have said before, 80% rallies in a 12-
month span, as we saw in the year to April, last happened in the early ’30s and
were followed by gut-wrenching spasms to the downside. So for any investor,
return of capital is yet again reemerging as a very important theme, and the
need to focus on risk-adjusted returns. This, in turn, means a strategy that
minimizes both the volatility of the portfolio and the correlation with the equity
market is completely appropriate — the best way to play this is with true long-
short hedge fund strategies.
So what fits the bill?
Gold is also a hedge against financial instability and when the world is awash
with over $200 trillion of household, corporate and government liabilities,
deflation works against debt servicing capabilities and calls into question the
integrity of the global financial system. This is why gold has so much allure
today. It is a reflection of investor concern over the monetary stability, and Ben
Bernanke and other central bankers only have to step on the printing presses
whereas gold miners have to drill over two miles into the ground (gold
production is lower today than it was a decade ago; hardly the same can be said
for fiat currency).
Moreover, gold makes up a mere 0.05% share of global household net worth, so
small incremental allocations into bullion or gold-type investments can exert a
dramatic impact. Gold cannot be printed by central banks and is a monetary
metal that is no government’s liability. It is malleable and its supply curve is
inelastic over the intermediate term. And central banks, who were selling during
the higher interest rate times of the 1980s and 1990s, are now reallocating
their FX reserves towards gold, especially in Asia.