Bonds: What are the safest sectors?
Summary
We have written often about why we are bearish on US Treasury bonds (that position has risen 27% since our recommendation of 22nd December 2008), and how China can influence U.S. bond yields. Indeed, Dr. Geithner's recent niceties concerning the RMB - that, actually, it is not "undervalued" - lend credence to our view that Beijing holds not inconsiderable sway of the direction of U.S. bond yields. Particularly at the long end of the curve.
Today we want to home-in more on what sectors you should, and should not be looking at buying into. Readers know of our Economic Clock®. Please always use it as a compass, not as a precise, "one and only" indicator. Its aim is directional. So far it has fared well, even if markets are in the grips of a bear rally, as we discuss in today's Advice Tracker update.
Topics Covered
- The Economic Time® and banks' margins
- Which sectors are safe?
- How to make money off this idea
Background
1. The Economic Time® and banks' margins
We have described and updated the Economic Clock®, so have a look at our proven framework.
In a nutshell, our Clock works on the premise that there is either too much or too little of -
- money
- goods that people can buy
Currently, the Economic Time globally is characterized by America's, namely an
- excess demand for money: banks don't want to lend, and an
- excess supply of goods: people are losing their jobs, so they are saving their money.
Indeed, one key reason for recent, stellar bank profits has everything to do with this characterization of the Economic Time: people don't spend, so they save. So they put more money with their bank. That drives up the supply of cash at the bank, so down goes its price. Meanwhile, however, the bank does not want to lend. Thus, it reduces its supply of credit and presto, up goes its price...Therefore, bank margins boom when the Economic Time is at its worst!
2. Which sectors are safe?
Viewed against this backdrop, sector selection becomes easy:
- go "long" of what people always need, e.g. electricity and water, telecoms, health care, pharmaceuticals, grocery chains,
- go long of the "cheap and cheerful" counters like fast food and home entertainment, and
- go "short" of what people don't need, e.g. traveling (airlines), discretionary spending (e.g. luxury goods).
3. How to Make Money Off This Idea
- Always consult your financial adviser first.
- Go "long" of what people always need, e.g. electricity and water, telecoms, health care, pharmaceuticals and grocery chains.
- Go long of the "cheap and cheerful" counters like fast food and home entertainment.
- Go "short" of what people don't need, e.g. traveling (airlines), discretionary spending (e.g. luxury goods).
