These are Truly Historic And Dangerous Times
The comments below are an edited and abridged synopsis of an article by David Rosenberg
We are living in dangerous times. The stock market seems cheap and the Treasury market is expensive. We are living through a period of history that will be written about in textbooks, and the undertones are not good.
We have a bond market in which a quarter of the universe trades at a negative yield. The long bond yield has gone negative in Germany. More than half of the world’s bond market is trading below the Fed funds rate. Investment grade yields, on average, are below zero in the euro area.
This is abnormal, because it reflects an abnormal economic, financial and political backdrop. Those who point to the stock market’s performance with glee don’t mention that in the past 12 months the total return is marginal in real terms, and the best-performing sectors are the ones you can only typically rely on in a deflationary recession.
One problem with the most recent recession is that the global debt load is larger now than it was at the peak of that prior credit-bubble cycle. The world is awash in debt. At the same time, the accelerated pace of technological change has led to even greater obsolescence in the labour force.
The world is splintering. There is Brexit; deep divisions within the EU; unstable conditions in North Korea; a trade war between Japan and South Korea; and Iran. There are renewed tensions between India and Pakistan, and the situation in Hong Kong bears watching. There is a trade, currency and economic war between the US and China.
All the while, central banks are being pushed into easing action.
Long duration yields are going negative. Debt dynamics are unstable and likely why interest rates have to go down, but if they are negative, how do assets with cash-flow streams get valued? The distortions are wild. Gold has broken out in all currencies, and central banks are adding bullion to their reserves.
Gold is soaring, bonds are rallying sharply, the equity market is rolling off the highs. We have a tariff and currency war. It sounds a lot like the 1930s. Back then, it became a real war that cost millions of lives. This war will cost livelihoods.
Investment recommendations: Cash, gold, silver, long Treasuries—and limit your equity exposure to noncyclical sectors with strong balance sheets and reliable dividend/cash flow streams. Most important—be as liquid as possible for the next several months.
