Global Value Hunter

Why I’m Investing “Where it’s still 1981,”

where bond yields have decades of declines ahead
and stocks have decades of appreciation ahead

30 years US Treasury yields chart
30-Year US Treasury yields peaked in October 1981 and have been trending down ever since.

Many professional investors, from Warren Buffett, to Stan Druckenmiller, look foolish right now. They’re focussed on avoiding risk.

A focus on minimizing risk is actually the number one trait of every truly successful investor and trader. But as a result, they have largely missed the recent snap-back rally on US stock markets. Instead, they are still sitting in cash.

The amateurs, on the other hand, are throwing caution to the wind and making money hand over fist at present, mostly by trading momentum stocks or buying ETFs.

It’s as though Messi and Ronaldo are being nutmegged and run rings around by part-timers. It would not happen in any other profession.

So, ask yourself, have the pros lost their skills? Or have the rules of the game changed?

The Fed has moved the goalposts and altered the playing surface. But while anyone can score a lucky goal, true class and skill, once acquired, tend to be permanent.

Over long periods, successful investing is all about your process.

Results that are the product of a robust, repeatable process are real and enduring. If your process is not working any more, you can always move to a different playing arena, where the old rules still apply, and:

  • central banks aren’t flooding the system with money
  • real interest rates are solidly in positive territory, not below zero
  • every Tom, Joan and Harry doesn’t have access to free trading via a Robinhood account, or 1% margin debt at Interactive Brokers
  • boards aren’t borrowing cheap money for share buybacks to goose the value of their options packages; and
  • debt-to-GDP ratios are modest and not over 120%

These are the markets where, as I like to say, “It’s still 1981,” and the great decades-long tailwind of falling bond yields, which drove asset prices sky-high in Japan, Europe and the USA hasn’t even started yet… or at least hasn’t run its course.

As bond yields (the risk-free rate of return that all other asset classes are priced off) in early-stage developing and frontier markets decline over time, and these economies leverage up from a very low base, stock prices are going to have no way to go but up… just like they did in the developed markets, until interest rates went to zero, and these markets went “ex-growth.”

That’s the bet I’m placing anyway.

South and Southeast Asia, led by places such as India and Vietnam, as well as those countries in sub-Saharan Africa which are relatively stable, are where the prospects for a long rally in bond prices, slide in bond yields, and rally in “risk assets,” such as real estate and stocks, are best, in my view.

The long tail wind provided to US stock markets from falling bond yields since the early 1980s, on the other hand, is almost over. Bond yields are approaching the zero bound. It’s time to consider investing elsewhere to put the odds back in your favour.  

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