One year ago on April 1, 2015, in my persona as “Chicken Little,” I revealed my investment positions. As shown in the graph below, one year ago I was primarily invested in U.S. Treasurys and had 30 percent in cash. This investment position reflected my macroeconomic view that “the sky is falling.” And in case you’re wondering — yes, all of my Chicken Little articles include my real investment positions. People often ask for my investment advice; I respond by showing them my actual investments.
In this article we look back on 12 months of Chicken Little’s performance. For investors, we highlight aspects that remain the same and then note what has changed. We end with Chicken Little’s advice and a look at where Chicken Little is invested today (spoiler alert: still cowering in fear).
Chicken Little’s one-year performance
Over the last year, Chicken Little earned 1.3 percent. Is this good or bad? At first look, it seems pretty bad. It is very close to zero. Furthermore, consider that pension funds and endowments assume they will earn more than 7 percent a year. By these measures, 1.3 percent is pretty dismal.
However, if we look at investment possibilities over the last year, the 1.3 percent gain may look better. Let us look at stocks, Treasury bonds and gold.
When we started, on March 31, 2015, the Dow Jones Industrial Average was at 17,766. One year later, on March 31, 2016, the Dow was 83 points lower at 17,693. With dividends, the total return on the Dow Jones Industrial Average was 1.89 percent.
Looking more broadly, stocks outside the U.S. had a bad 12 months. Emerging market stocks lost 12.63 percent while international stocks in places such as Europe and Japan lost 8.40 percent. So investors in U.S. stocks made a little bit of money, while those who invested outside the U.S. had moderate-sized losses.
The best place to have been invested in the last year was the “safe-haven” assets of gold and long-term Treasury bonds. Both safe havens had relatively modest returns in absolute terms, but did well relative to stocks.
The last year has been a pretty challenging one for investors. The average stock in the world lost money, the best return among the choices above was gold and long-term U.S. Treasury bonds.
If we had a time machine and could go back to March 31, 2015, where would we invest? The highest return would have been to put all of one’s money into gold. However, that would have been very risky. Another reasonable alternative would have been to partially sit out the year by holding a lot of cash. From this perspective, Chicken Little’s decision to buy Treasurys and hold a lot of cash looks pretty good.
There is, however, no chicken victory dance going on, because one year is a very short period of time for investing. A good performance can become disastrous in a few days with turbulent markets. So Chicken Little’s preliminary self-grade is an A* — an A for avoiding money-losing, foreign stocks and picking among the best investment choices. An asterisk to note that we are not even in the first inning. As an investor, humiliation is never far away.
2016 looks like 2015 in many ways
Plus ça change, plus c’est la même chose. “The more things change, the more they stay the same,” as the French saying goes.
We continue a grand Keynesian experiment. The cure to problems caused by loose money and too much debt is, according to current policy, looser money and more debt. Governments around the world continue to print money and spend with reckless abandon.
Loose money means low interest rates and the purchase of assets through newly created money (also known as quantitative easing). The massive monetary experiment is truly hard to fathom. Table 2 summarizes current monetary policy around the world by way of the U.S. Federal Reserve, the European Central Bank and the Bank of Japan.
The Bank of Japan is pursuing the most aggressive quantitative easing program in the world. Newly created yen equate to one-sixth of the size of Japan’s economy each year. In January of 2015, Japan moved to negative interest rates. On both measures, Japanese monetary policy is the loosest it has been in its history.
But the loosest monetary policy award may go to the European Central Bank. European interest rates are even more negative than those in Japan. In addition, the European Central Bank recently expanded its money creation to nearly 1 trillion euros per year — the greatest rate of money creation by the European Central Bank in its history.
The U.S. Federal Reserve is also pursuing a super loose monetary policy. Short-term interest rates are fractionally above the lowest rates in U.S. history. After creating $4 trillion dollars of new money in recent years, the Fed has paused its quantitative easing program.
For investors and savers, the Keynesian experiment means low interest rates. If you’re prudent enough to be a saver, you have been placed in a terrible position by low interest rates. Senior citizens, in particular, face two unattractive alternatives:
Senior citizen alternative #1: Invest in Treasurys, and eat cat food.
Senior citizen alternative #2: Gamble. Eat caviar until the bust, then eat at the soup kitchen.
More generally, the grand Keynesian experiment has led to tepid economic growth while creating daunting instabilities. Just this week, International Monetary Fund director Christine Lagarde warned once again that global growth is stalling.
In summary, global macroeconomic policies are unchanged from a year ago: We continue to experiment with the world economy by attempting to print and spend our way to prosperity.
What is new for investors?
1. The bull market in U.S. stocks might be over
It is said that no one rings a bell at the end of a bull market. However, the one sure sign of the end of a bull market is a failure to make new highs. The U.S. stock market peaked in May 2015 and has not made a new high in more than 10 months. This is the longest period without a new high since this bull market began in March 2009.
In April 2015, Chicken Little showed a chart of the Dow Jones Industrial Average and wrote, “This is a bull market in U.S. stocks.” A year later, the odds that we are already in a stock market decline are much higher than they were.
2. The nightmare of low interest rates has reached absurd levels.
Many government bonds around the world now pay negative interest rates. A negative interest rate means that you are guaranteed to lose money. Looking back just five years, the picture was much different. Interest rates in many places are now the lowest in history. Some pundits label low rates as “financial repression.” If you are a saver, you can choose your own word: unfair, obscene, depressing, horrible, ________?
Chicken Little’s current investment advice for readers
I believe that most people have too much invested in risky assets. By this, I mean the horror of trying to live on the low interest rates on safe assets has pushed people to take too much financial risk.
How do you know if you are taking too much risk? The simple approach is to recall how you felt with the roughly 10 percent declines in the U.S. stock market in August 2015 and from January to February 2016.
If a 10 percent decline in stocks causes you stress, then you probably have too much risk in your portfolio. In the last century, there have been four periods where stocks lost 50 percent or more of their value. The 1910’s saw massive inflation after World War I. Stocks lost 90 percent of their value in the Depression. Stocks also lost more than half their value in the inflationary 1970s. Finally, stocks lost half their value in the 2007 to 2009 declines.
I suggest that people scale back on their risky investments by a modest amount. For example, an investor could sell 10 percent of her or his stock position. Such a move would have little impact on wealth, but may allow for larger changes in the future. In particular, if the Dow Jones Industrial Average makes a new low below 15,000, Chicken Little will advise more sales.
Chicken Little’s current investments
Chicken Little remains invested for a deflationary depression. As shown below, this means a heavy dose of Treasury bonds and a substantial cash position. What about stocks? Chicken Little does not have a single penny invested in stocks and will, in fact, make a little bit of money if stocks around the world decline. (Chicken Little is “short” stocks, which is a position that makes money if stocks go down.)
As compared with the positioning a year ago, Chicken Little is even more pessimistically invested. Chicken Little became more optimistic about gold prices two months ago. The short position in stocks is larger, and there are more long-term Treasury bonds in the portfolio.
A few last thoughts from Chicken Little
The grand Keynesian experiment will end in ruin.
Furthermore, when markets move, they will move too fast for most people to react. To avoid being frozen in panic when the decline comes, I believe people would do well to reduce financial risk now.
The first year of the Chicken Little portfolio was successful primarily in avoiding losing money in global stocks and for picking a safe asset that rose in value. I expect future stock market moves to be much more extreme than they have been in the past 12 months.
You can compete or follow along with Chicken Little in the Chicken Little 2016 fantasy stock contest.