‘Life turns on a dime. Sometimes towards us, but more often it spins away, flirting and flashing as it goes: so long, honey, it was good while it lasted, wasn’t it?’
It’s a sea of red out there…and I’m not talking about Christmas.
Both the S&P 500 and the Dow Jones are trading lower than at the beginning of the year. NASDAQ is entering bear market territory with an almost 20% drop from its previous high.
Where is the Santa Rally?
Once again we realise how quickly things can change and the mood turn sour.
Markets are reeling after the US Federal Reserve stuck to their play book. They increased rates for the fourth time this year.
Yet the Fed sees growth slowing. They are looking at two rate hikes instead of three next year…they may not be raising at all…
But, as we told you, rates are only part of this equation.
To stave off the 2008 crisis, the Fed reduced interest rates close to zero and created about US$4.3 trillion through quantitative easing. This pushed asset prices, like stocks, up.
The Fed is now raising rates, but also decreasing their balance sheet and plans to keep on doing so at the same rate next year. They are currently reducing at the rate of US$50 billion per month.
As Chairman Jay Powell mentioned during the Fed´s press conference, the reduction of the balance sheet has been ‘smooth’, and he doesn’t see the Fed changing the plan.
As he continued:
‘We’re alert to these issues. We’re watching them carefully. But we don’t see, you know, the balance runoff as creating significant problems.’
The thing is, as we have said before, if lowering interest rates and increasing the Fed’s balance sheet has pushed stocks and property up, what do you think the opposite will do?
We could see asset prices plummet.
The big problem we see is that low interest rates has encouraged more debt. In fact, we think much of the ‘growth’ and ‘recovery’ we have seen in recent years has been from debt.
World debt has soared to a record high of US$247 trillion in the first quarter of 2018, or over three times the global economy.
As you can see in the chart below, global debt has increased in pretty much every sector in the last 11 years, but mostly in the government and non-financial corporates.
Source: Business Insider
Debt is receiving payment today for work to be done tomorrow. Yet, until what lengths can we mortgage our future?
Now fears of a recession are growing.
The trade war…Italy…Brexit…rising interest rates…I mean, choose the pin that could blow this debt bubble.
Where is the green in this big mess?
Well, almost everything is down except for bitcoin…and gold.
Gold could be your best investment in 2019
And gold has been the ignored investment after the spectacular gains in the stock market in recent years.
But gold will become important as central banks start tightening policies and fear starts to spread. Any shock could increase gold prices and send investors scrambling into gold to preserve wealth.
Gold has proven to be a wealth protector for centuries, and gold acquires more value whenever the outlook turns negative in the economy.
After all, gold cannot be created out of thin air, it has to be mined. And this is what makes it hard for gold to lose its value.
Gold could be a strong defensive measure in the next financial crisis, which I expect will be worse than the 2008 one.
The ideal is to buy physical gold.
If there is a loss of confidence gold should do well.
But it wouldn’t be smart to have all your wealth tied up in gold, of course. Having some cash is highly unlikely to be a bad thing.
The last years have been great for investors and bad for savers.
We have seen asset prices go higher and investors ignoring cash and gold.
We have seen record low inflation…low interest rates…low wage growth…low volatility.
As the Fed keeps reversing their policies, we could see the opposite.
That is, that asset prices go down and that easy money stops flowing.
This is a time to be cautious.
Expect the unexpected…and prepare for it.
With Christmas approaching, I wanted to take the opportunity to thank you for your continued support and to wish you and your families a very Merry Christmas and a happy and very prosperous New Year!
Editor, Markets & Money