Global Research Call: Monday, April 24, 9am EDT — With Charles Gave, Anatole Kaletsky and Cedric Gemehl

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Will Denyer

Will earned a degree in business and economics at the University of Oklahoma, supplemented by extracurricular education from the Mises Institute. He worked temporarily with our research team in 2005. We decided it was a good fit, so in 2007 he moved to Hong Kong to join our team. Will is now our lead analyst on the US economy. Will speaks English (including the occasional "y'all" in conversation), and is a struggling student of Chinese.

Will writes on a range of topics, but his current area of focus is the relationship between corporate profitability and interest rates (a la Knut Wicksell). He utilizes this framework to monitor the business cycle and provide portfolio construction recommendations. By request, some of Will’s charts on this subject are provided below, with the data updated daily.

For Will's article archive click here.



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Real return on investment capital (R-ROIC) is calculated as pre-tax operating earnings, less the cost of replenishing all invested capital at current cost, divided by invested capital at current cost. We then compare R-ROIC to real interest rates to get our “Wicksellian Spreads”.



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Portfolio managers should not simply shift between “all-in” and “all-out” based on whether our “Wicksellian spreads” (ROIC-COC) are positive or negative, for both practical and theoretical reasons outlined on slide 19 of Wicksell’s Guide To A Better Portfolio.  Instead, we suggest portfolios adjust gradually to changes in various ROIC-COC spreads, as they relate to their long-term moving average. For example, if corporate bond yields are rising relative to ROIC, one should gradually shift in favor of fixed income over equity. Investors might consider very safe corporate bonds, but when this spread is suggests a storm is brewing one is probably better off just buying Treasury bonds.



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US companies borrow at varying rates based on their perceived credit risk. Moreover, credit spreads can fluctuate dramatically. So, while the Baa corporate bond yield is a long-time favorite of ours—as a proxy for the cost of borrowed long-term capital for the average US corporation—it is wise to also consider the message coming from long-term risk-free rates.



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Most companies also have short-term borrowing needs. So, we also run our analysis using short rates. Here we use the Fed funds policy rate.  If short rates are rising relative to ROIC, one should gradually shift in favor of cash over equities.



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We also look at the message stemming from 1-month commercial paper rates. In summary, if interest rates (corporate or government, short- or long-term) are rising relative to the prevailing rate of ROIC, portfolios should shift accordingly in favor of fixed income (to reduce risk and also capture the best risk-adjusted returns available).



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The four spreads above, in sum, provide the asset allocation recommendations shown above. Exact percentages are not as important as the general weightings of the major asset classes. Equity/risk exposure can range from 0 to 100%, while the allocations to Treasury bonds and T-bills max out at 50% each. The T-bond allocation is determined by the average signal coming from our two spreads based on long-term yields (Treasury as well as corporate bonds).  T-bill positioning is determined by the signal stemming from the two short rate spreads. If the model suggests a heavier weighting on T-bills than T-bonds, that can be interpreted as a recommendation to shorten duration on fixed income portfolios. As a proof of concept, the model has significantly reduced risk (equity exposure) before all of the major drawdowns over the last 40+ years. Current recommendations are shown on the right scale.



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Charles Gave has shown that Portfolio Building In The Time of Disinflation is simple: by simply keeping portfolios balanced between equities and long-term bonds, managers can reduce volatility without giving up performance. Building on Charles’ work on Wicksell and portfolio construction, Will has developed a ROIC-COC based strategy that gets the same low volatility as the constantly balanced portfolio, but superior long-term returns over both inflationary and disinflationary periods (see Wicksell’s Guide To A Better Portfolio).

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