(BUNL) Archives

I certainly hope you took my advice to load your portfolio with corn and gold and to dump your equities five years ago. What? You didn?t? Then you have almost certainly suffered on the performance front.

According to data compiled by my former employer, the Financial Times, corn was the top performing asset class since 2007, bringing in a stunning 146% return. Who knew that global warming would be such a winning investment strategy? It was followed by gold (GLD) (144%), US corporate debt (LQD) (44%), US Treasuries (TLT) (38%), and German bunds (BUNL) (26%). This explains why my long gold/short Morgan Stanley (MS) has been going absolutely gangbusters today.

If you ignored my advice and instead loaded the boat with equities, chances are that you are now pursuing a career at McDonalds (MCD), hoping to upgrade to Taco Bell someday. The worst performing asset classes of the past half-decade have been Greek equities (-87%), European banks (-70%), Chinese stocks (-41%), other European equities (-21%), and UK stocks (-11%). If you were in US equities, you are just about breaking even (1%).

Corn is, no doubt, getting an assist from what many are now describing as the worst draught since the dust bowl days of the Great Depression. But there is more to the story than the weather. Empowered with long term forecasts from the CIA and the Defense Department, I have been pounding the table for years that food would become the new distressed asset. These agencies have been predicting that food shortages will become a cause of future wars.

For a start, the world population is expected to increase from 7 billion to 9 billion over the next 40 years. Half of that increase will occur in countries that are net importers of food, largely in the Middle East and Africa. You can also count on the rising emerging nation middle class to increase demand for both the quantity and quality of food. Obesity among children is already starting to become a problem in China.

Managers who have been wrong footed through being overweight equities and underweight bonds will get some respite in coming years. It will be mathematically impossible for government bonds to match their recent performance unless they start charging negative interest rates. My best case scenario has them going sideways to down in the years ahead.

Not so for gold, which will continue to see steady demand from emerging market central banks and their new middle class. Five years ago, gold trading carried a death penalty in China. Today, there are shops on every street corner flogging the latest issue of one ounce Chinese Panda coins.

As for corn, the sky is the limit. If you don?t believe me, try eating a one ounce Chinese Panda.

Is Corn the New Gold?

Have you ever wanted to spend your summers basking in the sunlight at your mountain top Tuscan villa, surveying the manicured vineyards which produce your own estate bottled wine? Are you drawn by the cachet of claiming George Clooney as a celebrity neighbor on the model strewn shores of Lake Como? How about a luxury apartment that is walking distance from the Vatican?

Hedge fund managers are salivating at the prospect of one of the greatest fire sales in history, as assets of every description are being dumped in anticipation of the hard times now hitting Europe. On the menu will be trillions of dollars of distressed loans hived off by desperately downsizing and deleveraging continental banks. Corporations are expected to dump money losing divisions and subsidiaries in a race to beat the coming recession, which is expected to be severe.

In many respects, these deals of the century represent the second shoe to fall after similar bargains were had in the US during the 2008 crash. Europe?s day of reckoning was postponed by four years, thanks to a recovery in the US, QE1, QE2, and Federal Reserve policies that kept interest rates at century lows.

The complacency in Europe since then has been staggering, with many turning their noses up, claiming it could never happen there. Some are predicting that the balance sheet scrub could take as long as a decade, similar to Japan?s tortuously long repair of its own banking system.

Some hedge funds are taking advantage of the wholesale withdrawal of European banks from the credit markets to beef up their own international lending?at much higher interest rates. The same funds, like Highbridge, similarly locked in enormous spreads in the US when conditions were dire. Several American private equity firms are said to be setting up new European distressed asset funds to peddle to pension funds and high net worth individuals. Those who made similar investments in the US four years ago, made fortunes.

For individual investors the easiest and ripest pickings may be among the European bond ETF?s that already trade in the market. Many of these have suffered gut churning declines in recent months as the European melt down unfolded, despite offering yields multiples of what can be found at home.

Below is a short hit list ranked in order of damage incurred from the recent peak to the trough:

PowerShares DB Italian Treasury Bond Fund (ITLY): -19%

Wisdom Tree Euro Debt Fund (EU): -13%

iShares S&P Citigroup International Treasury Bond Fund (IGOV): -11%

SPDR Barclays Capital International Treasury Bond ETF (BWX): -9.5%

Germany Bond Index (BUND):? -4%

Of course, the eternal question of when to buy is the open to debate. There have been enormous declines in European bond yields since the peak seen last week, with Italian ten year yields plunging from 8% to 6%, and Spanish yields plummeting from 7% to 5%. It was a simple shortage of paper, not any ECB intervention that drove yields down so rapidly.

Aggressive traders are already starting to scale in. Others say the worst is ahead of us and that these sovereigns could see 9% yields before the fat lady sings.

I think the safe play here is to use the major sell offs to start accumulating positions and count of the big cash flow to pay for it over time. You can hedge out your currency risk by taking out an equal dollar amount in short (FXE) positions. Triple ?A? French bonds were yielding 7% last week, while ?AAA-? US Treasuries paid a paltry 2.0%. Is something wrong with this picture? Guess how it will end.

Is the Fat Lady Singing for the European Bond Market?

Hey, Neighbor!

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