2009 asset allocation
Going into 2009 the temptation is to come out of cash, or its equivalents and return to the equity market to snap up bargains as Warren Buffett says he is now doing. Markets could indeed rally a bit further with a new US president and the succession of global bailouts and stimulus packages.Yet the recession in the real global economy is only just starting. Unemployment and business failures will surge. Losses by US public companies will be huge. It is hard to see Wall Street, only so recently humbled, bounce back strongly.
More likely is a resumption of long-term dollar weakness as soon as the asset sell-off has bottomed out, and that may have already started. Or the stocks markets might re-test and even exceed its November low which would rally the dollar a little further.
Deflation and inflation
What investors need for 2009 is a way of preserving capital, and not losing it. You can read about fancy recovery funds but are you really comfortable about who might be handling this investment on your behalf?That is why people are buying US treasuries at zero-coupon instead of earning money on a savings account. They do not even trust the banks. But stick to the global giants with state guarantees and I do not see t-bonds as any better.
The choice of investment class for 2009 depends crucially on whether the global economy faces deflation or inflation: deflation from falling asset prices and business revenues, or inflation from money supply creation by governments?
Hedge your bets
This is no time to buy into hedge funds whose borrowing levels are exceedingly dangerous in volatile markets. But this is a time to hedge your investment position because it is not clear how much deflation is coming or when inflation might appear.Cash or equivalent - preferably in a strong currency like the Swiss franc, Singapore dollar, Canadian dollar or even the Australian dollar (not the US dollar for 2009)- can be held against deflation.
But you should also keep a substantial allocation in gold whose performance in some non-dollar currencies in 2008 has beaten all other asset classes. This will protect you against inflation.
There is also a strong possibility that precious metals will have a particularly good 2009 with a continued flight to this safe haven and a breakdown in the futures market. Nothing else has much potential upside.
