SHIFTING PLATES
Nothing lifts the animal spirits of markets quite like the smell of fresh rounds of central money printing, to go with the central banks that never stopped.
The US Fed’s reversal in late January, (combined with intense early January jawboning from US Treasury Secretary and President to buy all the things) was sudden, and stunned markets for the pace of the reversal.
In fact, Jerome Powell, The US Fed Chair, assured markets in early December that they would be proceeding with further tightening and rate hikes due to the “awesome” nature of the economy.
Then, in late January, they couldn’t do it anymore. WOW.
Investors only seeing the “good” this bad news has had on stock markets really need to look again, specifically at the “why”.
In fact, we believe there are a number of “whys” requiring consideration for investors in 2019,
For Australian investors in particular, diversified asset allocation will be as important as ever as the global economy as well as the Australian property market continues to wilt under the strain of too much leverage. More on that later.
Back to the “whys”.
Why couldn’t rates go up in the US any further?
Why is the next move for Australian rates down, not up, after 30 months of 1.5%.
Why do we have 0 and negative interest rates in Europe and japan?
Leverage. The burden of debt is biting down hard.
This chart below is specific to the US but pictorially demonstrates global issues.
There are a number of unintended consequences of this current Global monetary system, changed from “Brenton Wods” in 1971 with the removal of the gold standard by Richard Nixon’s rude interruption of Bonanza one evening.
This event virtually fired the starting gun for uninterrupted credit expansion.
One of the main (unintended) consequences of this system change has been a huge growth in the division of wealth between the haves and have nots.
So again, in the US, it looks like this (thanks to Grant Williams for these charts):
Or this
So, the pushback is underway. In the US, the socialist Left is striking a real “tax the rich” cord with voters.
In the case of Europe, we’ve seen it already in France.
But Ground Zero for political upheaval in Europe seems to be not what we read about Brexit or “Yellow Vests” in France. It’s Italy where the extreme left and extreme right are actually working together against the EU.
Overall, the political upheaval driven by the growing divide of wealth is just getting started, and will no doubt become a pre-emanate theme for 2019.
We’ll go more into this in another note as we’d like to keep this one on track to share some key issues we’ll be helping clients navigate in 2019.
Pushback on wealth inequality wasn’t the “elites” of Davos’ economic forum in Switzerland last week’s only concern.
A truly gloomy set of economic growth forecasts from the IMF, BIS and others have emerged as well.
Are these economic downgrades caused by the well-reported slowdown in China or a result of an over imposing debt burden where ever we look?
For Australian investors, it matters not.
What matters will be the response of not just the soon to be elected left of Australia politics, but the emergence of very socialist elements worldwide as a result this political unrest.
The cost of giving the masses lots of free “stuff” will be measured by a nation’s currency.
We’ve seen so far this year that a rapidly falling AUD is a benefit for many companies, a curse for others and the main reason AUD GOLD sits comfortably over $1800 per ounce.
Allocating assets to beneficiaries of this continuing currency trend will be high on the agenda of investors setting up 2019.
How the economic systemic issues and social policies play out will be another discussion for another day, but for now, be warned, it’s happening.
We welcome any direct inquiry regarding asset allocation and let’s hope for a peaceful 2019.
And finally, this. Plenty of room “left”, if your benchmark is Japan.
