Asset Allocation

QUESTION:  Hi Martin,
First of all I enjoyed your 2018 Share Market Report and I am looking forward to your video updates. I am one of those retired investors with a typical 50% equities and 50% bonds portfolio. In your recent blog you stated, “The biggest losers have been the asset allocation followers. They assume they cannot forecast the future so they spread their assets hoping that the traditional 60% equities will make up for the losses on the 40% bonds.” Since both equities and bonds prices have rallied since 2009. Is this the time to change our portfolio mix to raise our equities percentages over bonds (my bonds are one year US treasuries). If so what should our portfolio mix be going forward?
Thank you for your guidance!

ANSWER: I really cannot wait to launch Socrates. Answering these questions depends entirely upon (1) your currency base, and (2) the country in reference. There will be a great divide between US government debt and that of Europe. The dividing line appears to arrive in 2019. For now, US debt will be the best performing and the short-term debt will have the least risk of a Forced Loan Conversion, which has taken place in Europe before post-World War II. A “Forced Loan Conversion” is a phrase I coined to identify what happens when a government cannot repay its debt. Italy simply decreed that short-term paper such as 90-day bills were converted to 10-year paper. There is no risk of short-term US debt going through a Forced Loan Conversion.

The Italian government engaged in a Forced Loan Conversion which was a mandatory debt conversion, known as “conversione forzosa” during 1926, which they would again impose during 1934. They forced debt holders to extend their debt by lengthening the maturity. This seriously impacted the full faith and trust in the Italian government. During the post-1926 years and then again after 1934, the mandatory conversione forzosa effectively was seen as a partial default by the government, which made it extremely difficult and costly to borrow on a short-term basis thereafter.

Governments are concerned about appearance. They will engage in Forced Loan Conversions to be able to say with a straight face that they are not defaulting. Therefore, the shorter paper will have the greater risk in Europe from 2019 onward. Additionally, interest rates will be on the rise as pension funds fail and smart money continues to migrate from Public to Private debt.

Any asset allocation to bonds MUST be private!!!!!!! A government can default or suspend debt and will never be prosecuted. Private companies do not have that luxury. The traditional asset allocation models will all blow up. We are in the process of helping some very huge portfolios to shift in preparation of what is to come.