The 10th Man 5: Your questions answered

Hello 10th Man Reader,

Before I dive in, I want to thank each of you who listened to The 10th Man 5 call and sent in your questions.

I said I’d answer as many as I could—and I will—but I need to point out that I got literally hundreds of questions. Hundreds. So I can’t answer them all.

A couple of other reasons your question may not have made the “answered” list:

With those caveats out of the way, let’s dig in.

I’m concerned about when to begin investing. I’ve read previous 10th Man issues where it was mentioned that it’s hard to recommend buying on the highs for obvious reasons. So should we be accumulating the funds for when the lows come?

Holding cash is an opportunity to buy something later, for cheaper. Cash is optionality—I’m a fan of it as an asset class. Cash is also liquidity and flexibility. And you can get a lot of the same benefits with cash-equivalent assets like T-bills, money market funds, short-term government bonds, things like that.

So yes, it’s always a good idea to have cash for when the lows come (knowing that the lows are the lows is another issue entirely).

And just because stocks in general are still over-valued, doesn’t mean that there aren’t opportunities out there today. I see opportunities in a few different areas. For example, as I said on The 10th Man 5 call, I like commodities—in various forms, including precious metals—right now.

You mention REITs. What types look attractive?

Back in January, I warned subscribers that we could be on the cusp of a rate cut cycle. That was before Fed Chairman Jay Powell folded to political pressure, so I now believe we definitely are. As I said on the call, I believe we will get rate cuts in 2019.

In a rate cut cycle, mortgage REITs (mREITs) should do well. As the yield curve steepens (short-term rates fall faster than long-term rates), mREITs can invest in mortgage-backed securities at better spreads. In turn, that helps boost mREITs’ profits.

mREITs are a decent way to play a recession (if we get one), too. Compared with buying S&P puts, mREITs offer a more attractive way to play a slowdown from a risk-adjusted return perspective.

Why don’t you give Powell more credit for his independence from Trump? He is a $100 million man. He doesn’t seem to walk in fear of Trump.

That’s pretty much what I thought when he was first made Fed chairman, but his actions say differently. The Fed has clearly demonstrated that there is a put option on stocks. And on bonds. And I’m convinced the Fed is going to cut rates at the top of the cycle. None of these strike me as actions of an independent, unafraid Fed or Fed chairman.

BONUS Q: This isn’t about The 10th Man 5, but have you changed your mind about the Canadian housing market?

Nope, I have not. To give a “right now” update, high prices, new mortgage rules, and interest rates that, until January, were rising are all hurting the housing market. And it’s starting to bite.

To answer another reader’s question, it’s not just Toronto and Vancouver that are in the bubble that may be starting to burst. Home prices in Q4 2018 fell between 1% and 2.7% in Edmonton, Vancouver, Calgary, and Winnipeg.

And by the way, real estate comprises about 12% of Canada’s GDP. That number jumps to around 20% if you include industries associated with real estate, such as construction.

A downturn in the real estate market poses a huge threat to the economy. I still have conviction in the “short Canada” trade, which you’ve likely heard me talking about before.

Speed Round

Re: 35/65 portfolio, what are your feelings regarding a 100% stock portfolio in dividend paying companies with an annual dividend raise?

I can’t be any clearer on this: Nobody, in any circumstance, should have a portfolio that is 100% in stocks.

What mix of bonds should one have in the 55% or 65% portfolio?

I’ve said for a while that the front end of the yield curve was the place to be—so, shorter dated maturities (1–5 years). That continues to be true today.

How likely is it that one of the extreme “socialists” gets the Democratic party nomination? Elected in a general?

Hard to say. I do think the polarization will continue and that one day, we could get a truly extreme, undemocratic form of government. I also don’t think Alexandria Ocasio-Cortez is the furthest-left politician we will encounter. Someone will come along who will make her look moderate.

How do you develop investment ideas?

It’s pretty much always led by sentiment. I watch sentiment and watch out for extremes in sentiment. If something looks like garbage, or is embarrassing to own, I start paying attention.

Debt is at the center of all The 10th Man 5 issues... what do you say to that?

Good point. Another point—the debt we have is a spending problem, not a tax problem. And there isn’t a presidential candidate in 2020 who is interested in cutting spending.

Since interventionism, whether from the left or from the right, is rapidly crystallizing into our largest single risk, wouldn’t the best single way to protect one’s wealth from these different forms of government “interventions” into the economy be to simply buy precious metals and their related equities?

You are not wrong.

I hope you find these answers helpful. Stay safe out there.

Jared Dillian