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BTV Is it your estimation that the sell off still isn't over?
CW The price actions clearly been pretty impressive in this rally, I think there's a very good chance there's some real downside risk ahead of us. If you look back over all the price action, all sharp selloffs, when you have the sort of first wave of selling, as we had in late July through to early August, if you look at all the examples of that over the last few decades, there's about 15 really clear examples. And in 13 out of 15 instances, you rally in your wave to relief rally, as we've been doing for a couple of weeks, and then you go back and you retest those lows.
The relief rally has been very strong and perhaps a little bit stronger than I expected, but I still think that's probably your main framework. And it's interesting to me, if you look at one or two other risk assets out there, you mentioned 30 year bond yields making new yield lows or you look at ten year bond yields, they're just above where they were on the 5th of August, at that low point or certainly with oil, oil been selling off.
So quite a few other risk assets are starting to behave as if there may be a bit of downside from here. I think the next two weeks is critical - watch the price action. I think if it doesn't sell off, the best it'll do is go sideways and maybe have a couple of wobbles. But certainly, and 13 out of 15 times, you'd expect a pullback back to the lows that we saw around August 5th.
BTV …. this disconnect between bond and equity markets. So many people have pointed it out, Chris, because bond markets are supposed to be the sanguine, the sobering view, but instead we've seen remarkable volatility in this bond market. What does it mean just for asset allocation to have bonds, as some people have put it, acts like meme stocks and really equities be a calm voice and just keep chugging along?
CW It's a challenge because the sort of old 60/40 equities to bonds, that sort of classic weighting that's meant to give you that ballast, as you say, with bonds giving you ballast when equities sell off, the correlation between bonds and equities keeps changing.
It’s changed a number of times over the last couple of years and changed again recently with bonds actually rallying in the sell off into August the fifth as equities went down.
They weren't doing their job then. I still think you should have that balance in a portfolio. It does have some hedging qualities, particularly if inflation is now beaten. It's when you've got an inflation problem that it doesn't work as a hedge. I think inflation is beaten in the United States. And therefore, bonds are back to doing that proper role and hedging against equities and risk assets as they sell off.
BTV …. when it comes to hedges, I wonder what you make of David Rosenberg's view of Rosenberg research? I just mentioned this idea that gold has further to run because households have high allocations to equities and they need a hedge and they don't trust bonds currently because of everything we're just talking about. So therefore gold makes sense.
CW Well, I think it makes sense because we're coming into a rate cutting cycle and, you know, we're going to start seeing some growing the money supply, which is basically, you know, money creation as we as we look out six, 12, 18 months.
So, you know, I like gold because I think it tends to do well in response to that. What I would say, though, is (rule of thumb), most asset classes tend to rally for 2 to 3 years before they have a sort of major give back for a year/18 months, that’s sort of a rough rule of thumb I like to keep an eye on.
And of course, gold's been rallying since its lows in August 2020, it's had a very long rally. It's done extremely well. It had a consolidation phase and then it picked up that rally, again, sort of earlier this year, back end of the last year.
There’s a degree of tiredness to this rally. I think there's more to go for. But I'd say we're 80% of the way through. And we're going to find as we get six months on. I guess what I'm saying is that I wouldn't jump in hard on the gold trade. The best gains are behind us. There's probably still a bit more there but it's limited in that once we started pricing in the rate cutting cycle, the sort of momentum behind it is going to slow.
BTV Chris, just to take a step back, because you are a student of history in these markets as much as anything else. And it is in this moment really the past year that we've seen just this pendulum swinging back and forth between views of soft landing two, hard landing two, we're falling off a cliff, to everything's okay. You just see the volatility in asset classes in the meantime. What do you recommend to clients to do? Do you need to be more of a short term trader to really capitalize off of some of these swinging views? Or is it you take a step back, you try to act sober and you don't react to every market move.
CW I think the key here is if you're an investor, which I regard as someone with a sort of six month plus timeframe, six months to two years or beyond, you want to use a volatility as an opportunity. Of course, if you are a trader, then try and trade it and we have short term products that then look to do that. But if you're an investor, you want to think about what's the next big global macro theme coming out there? What's going to drive markets on the next 1-to-4-year timeframe?
I think the key here is the fact we're getting into rate cutting cycles across the West. That's key point number one. And key point number two is that the private sector in the U.S., the UK and Southern Europe and lots of other bits of Europe has healed. Post-financial crisis, it was in a mess. Households were overindebted. The corporate sector was tricky. The banks were not in good shape. All of that's gone. That's now healed. The pandemic sort of accelerated that healing, and they're now in very good shape. Just look at eurozone household savings ratio. It's at its highest it's ever been except for in the pandemic.
So there's a lot of firepower out there that respond to falling interest rates. And that is what should dictate how you invest when you get these bouts of volatility. Because I think over the next 1 to 4 years, the driver of the global stock market is going to change.
It's not going to be the magic seven anymore. It's going to be much more classic cyclicals, more non-U.S. equities as well. Some mid and small cap U.S.
So that's how I'd approach it if I was a long term investor, (which I see I suppose I am in a sense). But if you're a trader, of course, play the swings, but that's a totally different ballgame and a totally different set of tools to go about doing that.
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