Over the past few months there has been a lot of ‘OMG the inflation is coming’ talk.
But since the big US inflation number hit a few weeks ago, bond yields have declined. The 10-year government treasury yield in the US is now 1.57%. It peaked in March at 1.75%.
In other words, the bond market is not worried about a strengthening economy or rising inflation. In fact, it seems more concerned about a slowing economy.
So does gold. Yesterday, the yellow metal rallied to over US$1,900 an ounce. That’s the highest it’s been since January this year.
Gold is a defensive asset. It usually rises on concern about the health of the economy and/or monetary system. It bottomed in March at US$1,680 and is now around US$1,900.
Gold and bonds are telling you something. In a few months’ time, I think you’ll know what that is. With this in mind, today I’m reproducing a note I sent out to subscribers of Greg Canavan’s Investment Advisory. I hope you find it insightful.
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‘In your May monthly issue, I made the case that risks were to the downside over the next few months.
‘I think you’re seeing the early stages of that now.
‘Last week’s crypto sell-off was an early warning sign that the speculative juice is coming out of the market.
‘Let me explain…
‘I recently took out a trial subscription to Rosenberg Research. Dave Rosenberg is one of the world’s best economists/market strategists. He is a brilliant contrarian thinker.
‘I’ve been reading his stuff on and off since around 2007 when he was at Merrill Lynch.
‘Anyway, the first note hit my inbox last night. I was pleased/not pleased to see Dave thinking along the same lines…
“Everywhere we look there are signals of change occurring underneath the hood of the market. Indeed, some of the massive speculative manias that had previously led markets have recently peaked and rolled over. Looking at the table below, we can see some great examples of this — select FAANG stocks (Apple, Amazon, Netflix down 13%, 10%, and 16% respectively), IPOs (-24%), SPACs (-24%), Lumber (-23%), Tesla (-35%) and Bitcoin (-36%) have all shifted to corrections or outright bear markets.
“Ultimately, this is just another example of the choppiness and “churn” that is occurring beneath the surface that we have been describing of late. As is typical of all market tops, it is the most speculative areas that tend to peak out and roll over first. The dominos will fall next on the more cyclical parts of the market and especially the ones that believe we are into some new inflationary era (commodities as an example). Time to get more defensive both within the equity market and across the asset classes.”
‘What’s going on here?
‘Well, I think it’s simply a matter of “peak stimulus” being behind us for now. A huge amount of speculative capital came into the market last year and into 2021 due to global pandemic-related stimulus. But like the pig in the python, it is moving through the system now and having a diminished impact.
‘As I’ve discussed on numerous occasions, “Life at Zero” isn’t all plain sailing. Markets won’t go up in a straight line. There will be frightening pullbacks along the way to higher and higher stock markets.
‘It is these frightening pullbacks that will ensure the authorities do something even more absurd down the track. This will further destroy the purchasing power of currencies.
‘The key to dealing with this is foresight. If you know there is an increased probability of something coming, you are in a better place mentally to deal with it. It also gives you time to position your portfolio for turbulence.
‘To be really clear here, I don’t expect things to go pear-shaped in the broader markets immediately. Major indices in Australia and the US are still in healthy uptrends. This could still take three to six months to unfold. I’m just alerting you to the warning signs.
‘That’s why I wrote about this in the May issue and have been focusing on gold again.
‘Over the next few weeks, I’ll be looking at making some adjustments to the portfolio. I have a few stocks on my radar to buy too…those that are completely out of synch with the economic cycle that may provide a decent hedge if selling does take place in the months to come.
‘For now though, have a think about how your portfolio is positioned. Are you exposed to any of the highly speculative themes of the last 12 months?
‘Copper is a good example. It’s surged 150% from the March 2020 low to the recent all-time high. But it’s now back below that high. I wrote about this in yesterday’s [Monday’s] Insider.
‘Again, I was pleased/not pleased to see Dave mention copper in his note. In the chart below, he shows China’s credit impulse slowing, and suggests this is usually a precursor to copper falling too…
‘I would argue that there is an ever-greater correlation to iron ore prices. If that’s the case, BHP and RIO may soon start putting pressure on the ASX 200.
‘To sum up then, I think it’s time for caution. If this pullback/correction plays out as I expect, there will be some great buying opportunities. You just want to have some cash ready to take advantage of them.’
Editor, The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.