Regular readers won’t be surprised by current events. The surprise is how long it lasted before the euphoria about the global economy being in sync met the chilling reality that jacking up Debt Servicing costs after an Interest Rate Ice Age to head off inflation, would expose the Central Bank Trap.
You cannot print your way to sustainable growth, this is the key to the lock.
We’ve reached that point when stock markets sell off, realising that rising Government bond yields heralds a global warming of interest rates. These can only go one way, that is up, exposing the weakest parts of the ‘Everywhere Bubble’ created by years of extremely cheap capital to bursting.
If you want to learn more of the reasoning supporting this view there’s plenty of material, but you won’t find it in the consensus, in the middle ground, you’ll find it instead on the fringe of the groupthink that has been driving the consensus. You can get a copy of The Pivot for €20 from www.jackandjill.ie or send us an email to email@example.com. If you want something quicker;
Jan 2018 Irrational Exuberance
Nov 2017 Structural Recession
Jan 2018 Interview with Eamon Dunphy-What’s to Come
Lunchtime Tues Feb 6th 2018
As the US market opens what we can say is that yesterday alone, US equities blew off 4% of their value and the selloff was across the board. Meanwhile US ten year bond yields which had been rising, fell back to 2.75%. The concern is that rising inflation will cause the Fed to accelerate raising interest rates which in turn will dampen economic expansion and cut the legs from under current pricing for shares and for property.
But the bigger concern is why long term bond yields continue not to buy into the broad-based recovery story.
This week’s events so far are well within the historical experience of corrections at the tail end of bull markets. Since WW2 in the US there has been 22 drawdowns of over 10%, the average being 13% and they’ve been shallow, typically lasting four months with a further four months to recover.
Throughout the world this is the data that bullish asset managers will be spreading to investors after what appeared to be the strongest start to stock markets for 30 years. The underlying conditions globally are all flashing strong momentum, growth is picking up, tiny interest rates are accommodative, US taxes are being cut, profit margins are holding, the list goes on.
But underneath this lies real concerns not about the excessive price run up in asset values coming off like froth on a beer, but that the recovery itself is propped up on just one leg – the continuation of the ice age for interest rates. As economies heat up and especially as the labour market tightens and demands a bigger slice of the vast profits passing to the balance sheets of the owners of capital, a wage / price spiral will unfold forcing Central Banks, led by the Fed, to jack up interest rates. This is the trap.
Others like myself believe that the real risk is not of a cyclical recession but a structural one, that there is too much debt (up 50% since the GFC) and not enough economic growth to sustain it, that there are imbalances everywhere and raising rates will pop bubbles.
Don’t confuse this view with pessimism, below is the transcript of a TV3 AM interview Feb 2009 exactly eight years ago, when in the shadow of the Lehmann supernova, a stock market rout and an overwhelming mood of fear, swimming against the tide, I called an imminent US market recovery for the reasons outlined. The market troughed four weeks later, March 2009 and, an eight year bull market began.
Feb 2009 TV3AM
What can you do?
It is quite impossible to trade markets trying to time ins and outs when the gyrations during periods of turbulence are driven by computer-based trading algorithms and when conventional financial investment products, (personal and pensions), are based on the strike price of the next day, so trying to do it is a lottery.
In this climate the key, as ever, is to ensure that your medium to long term strategy is appropriate, that means applying the dreary but tested concept of having a diversified basket of uncorrelated assets. It means that if your equities fall, good bonds and gold will be rising, that other asset classes in multi-asset funds are compensating.
On the other hand, if you’ve bet too much on one asset class that’s dependent on continued crushed interest rates and cheap capital creation, like property, like equities etc. it is, at best, the 11th hour if this is the start of something bigger and wider.
Gold is an asset class which we’ve been adding to client positions since 2004, recommending gold to represent range 5% to 10% of liquid assets when it was trading at half its current price. Gold still recommends itself as a hedge against fiat currency devaluation from inflation and against unpleasant events. It ought not to be viewed as a speculative asset class but more like an insurance underneath a broad-based basket of conventional assets. You can get gold here;
Undertake a Strategic Review?
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Hobbs Financial Practice ltd is just a click away if you like to talk to Eddie about future-proofing your balance sheet, how to reposition financial assets, email email@example.com. Nothing is too big or too small, we reply to all enquiries, just pop us an email and we will take it from there.
The Pivot, available from www.jackandjill.ie for €20 all of which goes to fund paediatric nursing hours. The Pivot is also available by contacting us at 045 409364, just ask for Sarah and she can arrange for you. It is not in the shops.
Eddie Hobbs, 6th February 2018
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