Chief Investment Officer
Summary: As we predicted, policymakers rushed to the aid of late-2018's faltering markets with more of the same: credit and a QT pause. Clearly, a new narrative is needed, and we think it's time to re-evaluate risk.
• Quantity of money collapsing
• Price of money rising
• The price of energy = a tax on consumption
• Anti-globalisation = reduced global trade volumes
Then in December, we moved to our new theme of 'Global Policy panic'.
The Global Policy Panic argument held that, in a world with no business cycle and just a credit cycle in its place, a slowdown or an equity market selloff would be met with more credit and a pause from the Federal Reserve.
This has now come to pass, and January of this year saw a market return in excess of the weighted yearly return normally expected for an entire year!
A new impulse and a new narrative are clearly needed...
(The China-US trade deal will go ahead, but only on the level of a framework... or rhetoric, really.)
What you should be concerned about as you move to manage/protect your portfolio is summed up in these two charts from today's edition of the Wall Street Journal's Daily Shot:
• There is zero confidence in the real economy – not among consumers and not among banks.
• The first chart dictates growth and earnings, and the second dictates inflation through the multiplier and the velocity of money (i.e. ever lower inflation).
Start by offloading 'risk-on' for a more balanced view (there is no need to panic, the illusion of an incoming trade deal and incoming reflation will largely remain just that).
Sell calls on upside equity risk, particularly in the US, which is extremely expensive again.
Increase cash or buy protection in both equities and high-risk currencies (GBP, AUD or KRW verus CHF, DKK or JPY).
It is time to re-estimate your risk. Whatever the level you have chosen, I am cautioning that the trade deal narrative could wind up being a very "buy the rumour, sell the fact" affair as the Four Horsemen come riding back in.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.
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