What we like the most about the Fund King System is that one need not have a “View” to use it. The system works just as well if one is bullish, bearish, growth infatuated, value oriented, income obsessed, tempted by commodities or just confused. It is designed to remove all those emotional biases from one’s investment decisions.

However, on our recent North American marketing trip, a surprising number of people asked us for our “View” of the market. We do have a very strong “View” and it was instrumental in constructing the System and the methodology for using it. We developed the Fund King System because we believe one should use the right tools for a given investment situation. The Fund King System is designed to work in the present. To understand our view of the present, it is useful to look at the past and compare both the environments and the toolboxes.

The Past: Goldilocks Period

The period from the mid 1980’s until 2000 was often referred to the “Goldilocks Economy” in the popular press. And in many ways, it was “just right”. Inflation was low and interest rates were stable or falling. Consumption, investment, productivity and profits were growing. Whole chunks of the “Third World” were reorienting themselves into fast growing “Developing Economies” or “Emerging Markets”. In short, it was a good time to be an investor in stocks, bonds and real estate.

Purveyors of investment advice and products responded by adjusting business models and their interaction with clients. Financial supermarkets make more sense than small boutiques in the rush to convert America’s middle class from savers to investors. Top Down analysis was out because pretty much everything was going up. Bottom Up analysis was the way to compete for the extra basis points that became misattributed to “alpha”. And, with everything going up and interest rates falling, leverage was good. In fact, if a bit of leverage was good, more was better. The advice to clients: Buy and Hold, Borrow as much as you can, Buy the Dips, and finally, Buy broad indices to save transaction costs…because everything is going up.

The Efficient Market Hypothesis reigned supreme as an intellectual organizing principle.

The Present: Post-Goldilocks Period

Since 2001, however, things have changed. Increased leveraged turned into the Debt Supercycle. At first that meant diminishing incremental returns for each unit of new debt but now it has left the developed economies with a severe hangover and the formerly fine-tuned economic engine is no longer producing a smooth output of steady, low inflation, growing consumption and growing investment. The economies of the US, Japan and most of Europe are struggling along at just above stall speed. Any variation in inventories, consumer confidence, government spending or investment could tip one or more of the developed economies into recession in any of the coming few quarters. Debt levels are high, banks in the developed world are wounded, velocity of money continues to sag and even productivity has stagnated.

Bernanke as Goldilocks
Source: www.whatamimissinghere.com and www.PoliticalCartoons.com

Those who look back to the ’70’s might notice a lot of similarities. For a quick refresher, check out the Doonesbury cartoons of the era to see a time when most things did not work out so well in America. It was the time of Carter’s “Malaise Speech”, the Energy Crisis and Ford’s Whip Inflation Now initiative.

When we approach today’s market with our “Goldilocks Era” investment toolbox, the outlook is depressing because our Buy and Hold tools will likely deliver very low returns. The result would have been no different in the 15 years prior to the Great Bull Market which started in August 1982. If however, we look at the ’67-’82 period carefully, we note that there was a tremendous amount of asset and sector rotation which yielded many opportunities to invest profitably. While the S&P500 may have only advanced 32% in the 14 years from end ’67 to end ’81, the Nikkei 225 (the big emerging economy of that period) expanded almost six fold (+498%). Gold, silver and other commodities all had big multi-year run ups, and subsequent returns to earth.

Price is important once again

We are in a Post-Goldilocks investment environment and we need new tools to invest successfully. Certain investment ideas will work at some points and underperform badly at other points. The price of an asset, deemed to be always correct under the Efficient Market Hypothesis, is important once again because we are in a period where one needs to buy low and sell high actively. The Fund King System allows you to harness the massive amounts of data available to make those decisions efficiently.

In the cartoon above, Ben Bernanke may be peering into the dark caves for a way to get us back to the Goldilocks economy we once enjoyed, but we think a more sensible approach is to deal with the investment environment as it is, not as we wish it might be.

So, what if we are wrong? An investment strategy is incomplete without considering all the possible outcomes. In our next newsletter, we will run through the five possible scenarios that will unfold in the coming five years.

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