I'd like to get some opinions/advice from the thread regarding allocation to fixed income. FI is not my field although I keep an eye on it for macro reasons. I would like to put a significant allocation for preservation of capital, and possibly get positive carry as well. Shortlisted choices are TLT, TIP, LQD, HYG, I'm aware of the difference between them. Any comments on the validity of the idea, alternate means etc etc are appreciated. On a side note, those of you who put on negative carry positions, ie short AUD/USD etc, how do you deal with it? Cost of doing business or do you finance somehow? I personally hate negative carry positions(not trades), I hate paying up.
regarding AUD shorts.... it is really difficult one. In early 90 AUD rate was 18% for a year. Presume differential was 5+%. Painful holding on. I think in '81 int rates were 21%. So, i rely on technical signals & stops to short. Luckily moves are fast so it does not cost much.
What are your views on future inflation/deflation? Personally I don't think there's any value in the longer end of the curve (TLT), all the more so due to Operation Twist. Anything short duration (2-3 years) is probably good. TIPS are OK but I have some concerns about how well they'd actually work in a significant inflationary situation as the principal and coupon adjustments are based on the CPI, which can be changed/manipulated. In addition the CPI-based adjustments to principal are considered taxable income, though that's true of any investment. The Treasury may soon start issuing floating rate notes paying bill-like yields with note-like maturities but a floating spread-based rate, if you're worried about potential inflation that might be a good place to hide some cash.
I agree that any EUR exit will tank the currency. 5-10 week panic at least, could easily drop 20-30 handles. Short on the news and place a stop 1x ATR above the ore-news price. As for asset allocation, most of my cash is in my trading and spec/investment accounts. I have about 25% in tax-exempt accounts, here is my 'balanced' AA: 20% domestic stocks 20% world stocks. 20% REITs. 20% Long government bonds 20% gold Rebalance after big moves, or annually. Keep in low cost ETFs, in tax-sheltered accounts. Total expenses about 0.25% per annum. If I get very macro bearish, I drop stocks/REITs a bit and boost gold/bonds or raise cash. Vice versa if i get very bullish.
Starting to look more and more like the Euro is going to cause chaos in the markets sooner than later.
I'd take the other side of that bet. In my humble opinion the odds of an actual "exit" are low -- still statistically viable, but something trifling like 3%. It would just be too much of a horror show, for any of the parties involved to do it rationally. If you do get an exit -- through exceptional political screwup, a game of chicken gone catastrophically wrong -- perception could be that the core euro just got much stronger, via the exit of a deadbeat from the collective credit pool, and that follow-on exits will only make it stronger still. Meanwhile, on the other side of the pond, odds of a huge Fed response would be guaranteed too, given that U.S. banks still have substantial european exposure. Put those together and EURUSD could actually go vertical...
I personally pay no attention to carry at all, positive or negative. I trade the major currencies using the CME FX futs and use those prices for entries/exits and stops. The carry is 'baked in' into the future price and a weak chart is still a weak chart even with 500+ bps of annual carry. If I'm paying significant carry and spot price is flat/not moving my way my stops will take me out sooner or later; a reminder my timing was off. IMO some of the fastest reversal moves in FX can occur in the carry trade currencies as they tend to move far away from PPP over time. Escalator on the way up, elevator shaft on the way down. I think DB had a paper out on the topic a few years ago.
I do these things in a portfolio context... Negative carry on a single position doesn't really matter. What matters is the carry/roll for the whole portfolio vs the optionality you're long/short.