Advertisement
Economic Forecasts

How to Profit From the Market's Rocky Road Ahead

Three top fund managers see falling prices followed by inflation. Here's how they plan to navigate this grim scenario.

Steve Romick, Manager, FPA Crescent Fund (FPACX)

Go-anywhere value investor "Of the federal debt outstanding, 48% of Treasuries mature within two years. So $6.5 trillion to $7 trillion of new debt needs to be sold over that period. Maybe not in the next two years, but at a point, that could really jack up interest rates -- even without inflation. We expect rising rates and inflation in three years or so. We're also shifting our stock mix toward larger, more global businesses with great balance sheets and high returns on capital. And we're seeking protection against inflation. For example, we like Aon, the insurance brokerage firm, whose commissions will benefit from the appreciation of the assets, such as buildings, that their coterie of underwriters are insuring. We also like Occidental Petroleum, a misunderstood company with cheap, on-shore oil reserves in California and elsewhere. We have also been buying whole mortgage loans from the likes of Citibank, Recap and others. These loans are mostly delinquent, but we are purchasing them at a 35% to 40% discount to their appraised value -- a solid margin of safety."

Charles de Vaulx, Co-Manager, IVA Worldwide Fund (IVWAX)

Global bargain hunter "There is no doubt that the contraction of the U.S. debt bubble is deflationary. [Paying down debt decreases the supply of money.] However, policymakers now must decide who is going to suffer: debtors, creditors or both. Because so much of the U.S. debt is held by foreigners, it will be tempting to inflate away the debt. [Inflation decreases the value of existing debt.] However, you don't go from a deflationary contraction to inflation in one year -- it might take three to ten years. But even with this bleak outlook, U.S.- and foreign-stock prices are compelling. We have recently been shopping among well-capitalized U.S. technology companies, such as Dell. We like Sodexo, a French catering company with significant U.S. sales, because it can pass on rising costs if food inflation picks up. We also hold 7% of assets in gold. Right now, the currency market is deciding which currency is the ugliest: the dollar, the euro or the yen. Gold is appealing by default. As for risks, we believe long-maturity Treasury bonds are vastly overpriced."

Jeffrey Gundlach, Co-Manager, DoubleLine Total Return Bond Fund (DLTNX)

Mortgage-bond maven "The next several years will be one of the most difficult periods we'll face in our investing careers. This is a time for preservation of wealth. For now, deflation and the burden of the debt overhang are ruling the markets. People have been living on borrowed money to aspire to a lifestyle beyond their means. Now we have to pay the price. Right now, the economy is living on government stimulus. My base case is either austerity now or we hit the wall with a debt crisis of our own later. Be prepared for much lower investment returns. Stay in long-term Treasuries, which don't pay much but at least preserve capital. But if global attitudes toward Treasuries change, sell immediately. In other words, if Treasuries, which should rally on recessionary news, sell off on economic weakness, you must act decisively and sell. For investors who require a higher-yield alternative to government issues, I would recommend Ginnie Mae bonds. Ginnie Mae pass-throughs yield more than comparable-maturity Treasuries and, unlike corporate bonds, have no default risk."

Advertisement
Advertisement

Most Popular

What Trump's Payroll Tax Cut Will Mean for You
Tax Breaks

What Trump's Payroll Tax Cut Will Mean for You

President Trump issued an executive order to suspend the collection of Social Security payroll taxes. How much could it save you?
August 13, 2020
8 Things You Must Know About Retiring to the Carolinas
retirement

8 Things You Must Know About Retiring to the Carolinas

From the mountains to the beaches, North Carolina and South Carolina offer retirees plenty of incentives.
August 14, 2020
7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020

Recommended

The 7 Best Funds for Beginners
mutual funds

The 7 Best Funds for Beginners

New investors have it better than ever. The best mutual funds and ETFs for beginners feature no minimum investments, dirt-cheap fees and broad market …
July 30, 2020
Metropolitan West Corporate Bond Has a Bright Future
Making Your Money Last

Metropolitan West Corporate Bond Has a Bright Future

This new-ish corporate bond fund is comanaged by familiar faces.
July 23, 2020
Oakmark International Disappoints Us
Kip 25

Oakmark International Disappoints Us

When this fund is good, it shines relative to peers, but when it is bad, it fares far worse.
July 23, 2020
Protect Your Portfolio From Inflation
Financial Planning

Protect Your Portfolio From Inflation

It’s not an immediate threat, but some warning signs say to set up some defenses now.
July 23, 2020